Note Recall: RBI tells house panel it acted on government advice

NEW DELHI: The government had advised the Reserve Bank of India (RBI) on the withdrawal of legal tender status of Rs 500 and Rs 1,000 notes on November 7 and its board had the very next day approved the proposal.

ET had on January 9 reported that the finance ministry had sent a reference to the RBI to take such a proposal for its central board’s consideration. In a seven-page note to Parliament’s department-related committee on finance headed by Congress leader M Veerappa Moily, the Reserve Bank has in its submission stated that the government had on November 7, 2016, "advised the RBI that to mitigate the triple problems of counterfeiting, terrorist financing and black money, the Central Board of the Reserve Bank may consider withdrawal of the legal tender status of the notes in high denominations of Rs 500 and Rs 1,000."

Union cabinet headed by Prime Minister Narendra Modi met within hours of that recommendation on November 8 and cancelled legal tender status ofRs 500 and Rs 1,000 notes.

Some ministers have thus far maintained that the government had only acted on RBI recommendation of demonetisation. The RBI in its submission has said it recommended to the government on May 27, 2016 that new series of bank notes with new designs, sizes, colors and themes including notes in the new Rs 2,000 denomination be introduced.

"The government gave final approval on June 7, 2016, and accordingly, the presses were advised in June 2016 to initiate production of new series notes," it said.

Since, any new design notes or new denomination will catch the fancy of the public, it was decided that enough large quantities of Rs 2,000 notes would be printed so that across the country such new notes can be issued simultaneously, it said.

It said when the stock of new notes printed was reaching a critical minimum, the decision to withdraw the legal tender could be made.



"Elimination of black money will eliminate the long shadow of the ghost economy and will be positive for India’s growth outlook. They also observed that in the last 5 years, there has been an increase in the circulation of Rs 500 and Rs 1,000 notes with an increasing incidence of counterfeiting," the Parliamentary panel was told.

The RBI said it had been in the last few years working on introduction of new series of banknotes with improved security features to secure them against counterfeiting.