RBI said no to demonetization during UPA-II..

As this blog wrote, one just hopes that RBI had cautioned the government against the demonetisation move. I mean with such small scale of demonetisation, RBI warned against monetary stability in both the previous instances. This time with such large scale demonetisation, no central bank independent or dependent should have let the government do it this easily. The mess should have been foreseen by someone who is not even an expert on these matters.

Though, having said all this things look murkier as days pass by. KC Chakrabarty, former DG of RBI spills the beans further. In this interview, he says RBI was asked earlier as well. The proposal did not even move to the Board level !

You were the deputy governor of RBI when the UPA-II government was at the centre. Was there any such proposal from the government during your tenure?

Yes, it had come from the UPA government. After examining the proposal, we had said that this should not be done. The proposal never went to the board level.

Was it a formal proposal? What was the reason for declining it?

Whether it came officially or over telephone, is not the issue. But I definitely remember it had come. We said ‘no’ because it does not serve any purpose… the cost is high and the benefit is less.

It has already impacted the banking system. For the next couple of months, banks will only concentrate on exchange of notes, no business can happen.

This is huge and comes at a very bad time for RBI. Why? RBI Act 1934 says:

26. Legal tender character of notes.
(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in 4[India] in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government].

(2) On recommendation of the Central Board the 1[Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification].

One imagines the amount of demonetisation would be small as suggested by previous Government. This time the operation was very secretive and obviously RBI board was not informed. But there was no ordinance either. Even in previous demon in 1978, RBI board was hardly kept in the loop but there was an ordinance as per the Act.

All this is getting too murkier.

Further Dr Chakrabarty says this move was rejected as it did not help in anything:

What is your view on the ongoing demonetisation exercise?

It has no economic rationale. It does not serve any purpose.

Why do you say so? The government claims that the move is aimed at curbing black money…

What is black money? No notes are black. All notes are white. It is the process that creates the black money. When a person does not pay tax, it becomes black money. Here you are killing the notes and not the fellow who is not paying tax.

The government also argues it will address the issue of counterfeiting…

If you buy a kilo of rice, there will be some small stones (interspersed). What you do is remove those particles and not the entire rice. The law enforcement authorities should identify those notes and take action. Here people are standing in the queues to get their own money because there are inefficiencies with the income tax (process), police machinery etc.

I am not aware of the thinking of the current government… I don’t know what information they have. I don’t know if they have the information that 90 per cent notes are counterfeit. I do not have this information. If they have the information then they should tell the people. They must disclose, per million pieces of Rs.1,000, how many counterfeit notes there are.

Much of these ideas from a former central banker have been echoed in this blog too…

3 Responses to “RBI said no to demonetization during UPA-II..”

  1. Kabeer Says:

    Lot of doubts cleared

  2. Ratul Das Says:

    On the rice and stone example you are correct. One should try to identify the stones and remove them and not the whole bag of rice. But what if you know that there are too many stones and moreover the cost of identifying them is high and if given a chance the stones will be shifted to another bag when you search for it. In that case it would be better to do off with the whole consignment of rice and start fresh.

  3. Kaushik Says:

    This is stupid! KCC says no positives? Are you kidding? Government should identify the fake currency? What have the previous governments done to identify this fake currency? The entire system has been corrupt, and all that fake money would have remained in the system. This move eliminates this entire dodgy system. Sure there are hiccups in this move, but KCC saying there are no positives in this move, makes me question his integrity and his competency

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