The Reserve Bank of India rejected two key justifications of demonetisation – curbing black money and counterfeit notes – while giving its approval to the decision hours before it was announced on November 8, 2016, The Indian Express reported on Friday. Banknotes of Rs 500 and Rs 1,000 ceased to be legal tender that midnight. Thursday marked the second anniversary of demonetisation.
In his address to the nation to announce the move, Prime Minister Narendra Modi had claimed it would end the flow of black money and fake currency. The Congress is set to stage a protest at the RBI headquarters in New Delhi from Friday noon to mark the anniversary, The Indian Express reported.
According to the minutes of the 561st meeting of the RBI’s Central Board, which was convened in New Delhi at 5.30 pm on November 8, 2016, the central bank’s directors had described demonetisation as “commendable” but warned that it “will have a short-term negative effect on the GDP for the current year”. The minutes of the meeting, which recorded six objections, had been signed by RBI Governor Urjit Patel on December 15, 2016.
The RBI directors had received a draft proposal of the scheme from the Ministry of Finance on November 7. In it, the ministry had said demonetisation would curb the flow of black money. The RBI Central Board, however, had said most of the black money is held in the form of assets in real estate or gold. “...This move would not have a material impact on those assets,” the central bank had said.
The ministry had reportedly argued that counterfeiting is on the rise in denominations of Rs 1,000 and Rs 500, amounting to approximately Rs 400 crore. The Central Board, however, had said Rs 400 crore “as a percentage of the total quantum of currency in circulation in the country is not very significant”.
The Board had also said that the growth of the Indian economy and its link to the large amount of high-denomination currency in circulation, which was made in the government’s proposal, was flawed since the rate of inflation had not been taken into consideration. It had also put in writing that the withdrawal of high-value notes would have a negative impact on tourism and medical sectors.
It had then said that private medical stores should be included in the exemption list. The Board had said the move would have an “adverse effect” on tourists who may be only carrying high-denomination notes.
The minutes of the meeting includes an “assurance” that demonetisation was under discussion between the central government and the RBI for six months during which “most of these issues had been discussed”. The minutes were signed off with the central bank’s resolution to withdraw currency banknotes of Rs 1,000 and Rs 500. “The Board was assured that the Government will take mitigating measures to contain the use of cash,” the minutes said. “The Board considered the memorandum and after detailed deliberations concluded that in larger public interest, the balance of advantage would lie in withdrawal of legal tender status of Rs 500 and Rs 1,000 currency notes currently in circulation…”