RBI meeting minutes show it had warned Centre against demonetisation

As per an information obtained under the Right To Information (RTI), the Reserve Bank of India (RBI) had warned that demonetising high-denomination currency was unlikely as most of the black money is held not in the form of cash but in the form of real-sector assets such as gold or real-estate and that the move would not have a material impact on those assets.

This was mentioned in the minutes of the 561st meeting of the board of the central bank, held n November 08, 2016. Demonetisation was announced by Prime Minister Narendra Modi on the same day at 8 p.m.

The minutes of the meeting were obtained by RTI activist Venkatesh Nayak, who had uploaded the same on the website of the Commonwealth Human Rights Initiative.

The intention behind note ban as given by the government was that there had been a steep rise in the circulation of Rs. 500 and Rs. 1,000 in the last five years. The government also mentioned that the economy had grown by 30 per cent during 2011-12 to 2015-16 whereas the bank notes in the denomination of Rs. 500 and Rs. 1,000 had grown by 76.38 per cent and 108.98 per cent respectively over the same period.

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Quoting a white paper of the Department of Revenue, the government stated that cash had been a facilitator of black money since transactions made in cash did not leave any audit trail. It also argued that incidence of counterfeiting was also on the rise in these two denominations (Rs. 500 and Rs. 1,000) and that the total quantum of currency in the country is estimated to be around Rs. 400 crore.

The central bank was of the opinion that while any incidence of counterfeiting was a concern, Rs. 400 crore as a percentage of the total quantum of currency in circulation in the country is not very significant.

Before demonetisation, the share of the demonetised notes in the currency in circulation was about Rs. 15.41 trillion, which was about 876 per cent of the total currency in circulation.

The RBI also observed that most of the black money is held not in the form of cash but in the form of real-sector assets such as gold or real-estate and that the move would not have a material impact on those assets.

The central bank also warned that the move would have short-term negative effect on the GDP for the current year (2016-17).

Clearly, the Centre went ahead without taking RBI’s suggestion into consideration.