RBI accepted govt’s demonetisation proposal because of fake notes menace
RBI said that a study conducted by Indian Statistical Institute, Kolkata, on statistical estimation of counterfeit notes indicated that FICN in circulation was approximately Rs 400 crore and around Rs 70 crore was being pumped into the system annually.Updated: Jul 19, 2017 15:42 IST
The Reserve Bank of India (RBI) accepted the government’s proposal to recall Rs 500 and Rs 1,000 banknotes because it was getting “increasingly difficult” to differentiate between genuine and counterfeit currency notes, the central bank has told a parliamentary panel.
The demonetisation decision, announced by Prime Minister Narendra Modi in a televised address on November 8, had sparked a nationwide cash crisis and left millions of people queuing up for hours at ATMs and banks.
Though the government came under persistent attack from opposition parties for putting people through a harrowing time, the ruling BJP got a thumbs up in the recent assembly elections that were projected as a referendum on demonetisation.
In a note to the parliamentary standing committee on finance recently, the central bank quoted the government as stating in its reference that counterfeit notes were being used for financing activities such as drug trafficking and terrorism and withdrawal of high-value notes could be a solution to it.
“RBI, on its part, found that counterfeit notes of high denomination of Rs 500 and Rs 1000 have been largely in circulation and it was becoming increasingly difficult to identify genuine bank notes from the fake ones. RBI saw an opportunity to put an end to the menace of counterfeit notes, particularly when the introduction of new design notes was in the offing,” the bank said.
HT has accessed the panel’s report.
While securing banknotes against counterfeiting was cited as the objective of the withdrawal of 17,165 million pieces of Rs 500 and 6,858 million pieces of Rs 1000 notes—valued at Rs 15.44 lakh crore—there was, however, no official estimation of fake notes in circulation.
“Estimating counterfeit notes in the hands of the public is a difficult proposition. However, a study conducted by Indian Statistical Institute, Kolkata, on statistical estimation of counterfeit notes indicated that FICN in circulation was approximately Rs 400 crore and around Rs 70 crore was being pumped into the system annually,” the RBI said.
At a meeting of the parliamentary committee on January 18, MPs had grilled RBI governor Urjit Patel about the rationale and impact of demonetisation. While former Prime Minister Manmohan Singh rescued Patel by saying that he didn’t have to answer all questions, the RBI governor was asked to provide answers in writing later. The Central bank furnished the replies in a note recently. The panel has summoned Patel on May 25 for deposition.
In reply to a query whether demonetisation would curtail black money, the RBI stated, “(The) government may be best placed to reply to this.”
It said the discussion with the government on the possibility of demonetisation had started in early 2016. The approval for introduction of Rs 2000 note and new design Rs 500 was received from the government on June 7, 2016.
To another query whether the views of the chief economic advisor and the finance minister were taken before the announcement, the RBI said, “(The) government may be best placed to answer this question.”
The central bank said that there was a continuous process of engagement with the government before the final announcement but no formal minutes of these meetings were recorded.
It did not provide the exact amount of money that returned to the banking system post-demonetisation, explaining that accounting of banknotes at the currency chests needed to be reconciled with the physical cash balances “to eliminate accounting errors/possible double counts etc” and it was taking all steps expeditiously to release the figures.
The parliamentary panel sought to know whether the RBI would transfer the money that does not return to the banking system to the government. The bank skirted a direct reply, saying that it is “enjoined” on its board to decide about the transfer of the surplus to the government after considering “the accounting and economic principles”.