This Article is From Jan 10, 2017

RBI Admits That On Notes Ban, It Followed Government's Lead

The government "advised" the RBI to scrap 500 and 1,000-rupee notes on the November 7


  • RBI offers explanation of notes ban to parliamentary panel
  • Felt notes ban would combat black money, terror-funding: RBI
  • Government advised notes ban on Nov 7, RBI ok-ed on Nov 8
New Delhi: The Reserve Bank of India or RBI has said that though it was the government that recommended cancelling high-denomination notes in November, the central bank felt that "such a proposal could not have come at a more opportune time." The government "advised" the RBI to scrap 500 and 1,000-rupee notes on the November 7, just a day later, the RBI board reviewed the proposal, and on November 8, Prime Minister Narendra Modi made the shock announcement of a demonetisation drive.

These disclosures have been made on paper by the RBI to a parliamentary panel - the Standing Committee on Finance - which is reviewing the notes ban.  Senior minister Piyush Goyal had earlier told parliament that the government had followed all rules and protocol in introducing the notes ban, though he did not say that it was the government that had floated the proposal to the RBI.

The central bank has been dealing with criticism that it compromised its autonomy by serving largely as a tag-along on the government's plans for a massive decision on currency.

The RBI has said that for several months, it had been in agreement with the government that introducing new notes would facilitate a crackdown on black money and terror-funding through counterfeited bills. In May, the RBI says, the government advised it to introduce Rs 2,000 notes.   

The abrupt withdrawal of notes that amounted to 86 percent of the currency in use triggered a countrywide shortage of cash. There still aren't enough new notes to meet demand, but the RBI has said that it felt there was enough currency to counter the impact of the notes ban.

On January 20, RBI Governor Urjit Patel has been summoned by another parliamentary panel to explain how demonetisation was decided and its impact on the economy.