Pinarayi Vijayan led 17 cabinet ministers and CPI-M chief Sitaram Yechury during the protest.
In a first of its kind in Kerala, Chief Minister Pinarayi Vijayan led a protest outside the RBI office in Thiruvananthapuram along with 17 cabinet ministers and party leader Sitaram Yechury.
Mr Vijayan and senior leaders from the Left Democratic Front walked from the Martyr's Column and reached the RBI to denounce the Centre's decision to sideline cooperative banks following the demonetisation.
The state government views the Centre's move as an "injustice" that would wreck the very existence of the cooperative banks in Kerala.
Starting the day-long protest, Mr Vijayan said the cooperative banking sector was the "live wire" of the rural economy in Kerala as it functions well within the rules but does not have the frills of commercial banks.
The CPI-M leader said the cooperative bank was a friend of the common man as it extends credit to him without any fuss.
"The deposit base in these cooperative banks is in excess of Rs 1 lakh crore and this banking system rises to the occasion to address the need of our ordinary people," the Chief Minister said.
Referring to the BJP, he said that some people alleged that these banks were flush with black money.
"The people standing in front of me... Does anyone of you have black money deposited in these banks?" chief minister Vijayan asked the crowd.
The Reserve Bank of India has withdrawn the facility given to the cooperative banks the right to accept or exchange the spiked 500 and 1,000 rupee notes.
The cooperative banking sector in Kerala is a three-tier-system, with about 1,600 primary cooperative banks attached to the 14 district banks that are linked to the apex Kerala State Cooperative Bank (KSCB).
Chief Minister Vijayan said he and his Finance Minister Thomas Issac explained the situation to Finance Minister Arun Jaitley who "we felt understood what we said".
"But as soon as this happened, the state BJP spread canards that these banks were flush with black money and after that came the decision of the RBI withdrawing the facility that was given to these banks," he said.
"This is nothing but a big rooted political conspiracy," said Mr Vijayan.
Former Chief Minister Oommen Chandy welcomed the protest of the Kerala government.
"We will support any move that comes to protect the cooperative banks and we are with them on this issue," said Mr Chandy.
The BJP says that these primary societies do not follow RBI guidelines while accepting deposits.
Mr Yechury, General Secretary of the Communist Party of India-Marxist, applauded the people of Kerala and their government for organising such a protest.
"We will have to take this protest forward to the rest of the country to end the anarchic policies of Prime Minister Narendra Modi," Mr Yechury said.
He said his party was discussing the matter with all political parties and that the withdrawal of Rs 500 and 1,000 currencies was done in haste.
He also said that the Centre did not make alternate arrangements prior to the demonetisation announcement on November 8.
"This is no way to tackle black money or to fight terrorism," Yechury said. "Forty people have committed suicide since the announcement all over the country."