The Reserve Bank of India (RBI) board had warned about the short-term negative effect of demonetization on growth and had noted that it would have no material impact on the campaign against black money. The central bank had listed four objections to the overnight notes ban announced by Prime Minister Narendra Modi before agreeing to it “in larger public interest”, an RTI reply has revealed.
The central bank board had met just about 2.5 hours before PM Modi’s sudden announcement in a televised address to the nation on November 8, 2016. The ban of Rs. 500 and 1,000 notes, which wiped out 86 per cent of the cash in circulation, was announced even before the board’s approval.
The approval was sent to the government five weeks later, on December 16, and the RBI had recorded its objections to most of the government’s arguments for banning high value notes.
According to the minutes of the RBI meeting, shared in response to the Right To Information (RTI) query, the directors had noted that it was a “commendable measure” but would have a short term negative effect on the GDP “for the current year”.
Then RBI Governor Urjit Patel, and the man who succeeded him as central bank chief — Economic Affairs Secretary Shaktikanta Das — were present in the meeting that approved demonetisation.
The government had argued that the circulation of Rs. 500 notes was up by 76 per cent and Rs. 1,000 up by 109 per cent. The RBI, however, said that argument did not adequately support cash ban recommendation.
The central bank directors also felt that while counterfeit notes were a concern, “Rs. 400 crore as a percentage of the total quantum of currency in circulation in the country is not very significant”. Also, most of the black money was held not in the form of cash but in the form of assets like gold or real estate and demonetization would not have a material impact on those assets, the board felt.
The board pointed out that the growth rate of economy mentioned was the real rate while the growth in currency in circulation was nominal. “Adjusted for inflation, the difference may not be so stark. Hence, the argument does not adequately support the recommendation,” the directors said.
The Board was assured that the matter had been under discussion between the centre and the RBI for over six months. There was also an assurance that the government would take mitigating measures to contain the use of cash.
More than 99 per cent of the banned cash returned to the system, which raised questions over the government’s drastic move to check black money.