Contrary to popular belief, it was the government which “advised” the Reserve Bank to junk Rs. 1000 and old Rs. 500 notes on November 7 and the Board of the central bank the very next day recommended the demonetisation.
In a 7-page note to the Parliament’s Department-Related Committee of Finance headed by Congress leader M. Veerappa Moily, the RBI stated that the government, on November 7, 2016, “advised the Reserve Bank that to mitigate the triple problems of counterfeiting, terrorist financing and black money, the Central Board of the Reserve Bank may consider the withdrawal of the legal tender status of the notes in high denominations of Rs. 500 and Rs. 1,000.”
The RBI’s Central Board met the very next day to “consider the government’s advice,” and after “deliberations,” decided to “recommend to the Central government that the legal tender status of the banknotes in the high denominations of Rs. 500 and Rs. 1000 be withdrawn.”
The Union Cabinet, headed by Prime Minister Narendra Modi, met within hours of that recommendation on November 8, and banned the circulation of Rs. 1000 rupee and old Rs. 500 notes.
Some ministers have thus far maintained that the government had acted only on a RBI recommendation of demonetisation.
In the note to the panel, the RBI said it was in the last few years working on the introduction of new series of banknotes with improved security features to secure them against counterfeiting.
In parallel, the government was taking steps to curb black money and combat terrorism.
“There were reports by intelligence and enforcement agencies that availability of high denomination banknotes made it easier for black money hoarders and counterfeited notes in high denominations were being used for terrorist financing,” the RBI said.
“It occurred to the Government of India and the Reserve Bank that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all the three problems of counterfeiting, terrorist financing and black money by demonetising the banknotes in high denominations of Rs. 500 and Rs. 1000 or by withdrawing legal tender status of such banknotes...
“Though no firm decision was taken initially, whether to demonetise or not, preparations still went on for introduction of new series notes, as that was needed in any case,” the note said.
The central bank said it had, as early as October 7, 2014, suggested to the government the need for introduction of 5,000 and 10,000 rupee notes, keeping in mind the inflation and the need for “facilitating payments and managing the currency logistics.”
The government, it said, concurred with the introduction of Rs. 2000 notes on May 18, 2016.
