How the RBI is Fighting Corruption - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 25 January 2014
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Corruption is one of the biggest problems facing India. In recent years, a large number of corruption scandals have been exposed, highlighting the depth of the problem. Most people agree that corruption needs to be brought down, but there are large disagreements over how to do this. The Reserve Bank of India (RBI) has emerged as an unlikely player in the fight to reduce corruption.

The RBI recently announced that they will disallow the use of bank notes printed prior to 2005, and all existing notes need to be exchanged for fresh notes. From 1st July 2014, these notes can no longer be used to purchase goods, and can only be exchanged for fresh notes at banks. In the meantime, individuals should use or exchange old notes that they currently have. The new notes have better security features and are more difficult to counterfeit.

On the face of it, this may seem like a fairly trivial policy. However, this type of policy can help dramatically with reducing corruption. Why is this the case? Nearly all corrupt behavior involves a cash transaction between two or more parties. Typically the sums in question are large, and in order to avoid detection, all corrupt transactions are made in cash.

In the long run, the more difficult it is it to make hidden transactions, the less corruption we will have. The more advanced banknotes will be easier to trace, and will make it more difficult to engage in corrupt transactions.

Ultimately, the RBI should encourage all large transactions to take place electronically rather than using cash. When transactions are conducted electronically, it is easier to monitor, and it is very difficult for anyone to hide transactions. The increased likelihood of getting caught will discourage individuals from engaging in corrupt behavior.

The RBI is doing its part to fight corruption. While the current measures will not be enough to solve the problem, they certainly help. If we want to reduce corruption, we must all do our part. If you find yourself having to exchange old banknotes, keep in mind that the inconvenience of doing this is worthwhile as it ultimately helps reduce corruption.

What is your take on the open market operations conducted by RBI? Let us know your comments or share your views in the Equitymaster Club.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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10 Responses to "How the RBI is Fighting Corruption"

BISWESWAR GHOSH

Jan 27, 2014

It is not possible to hide corruption totally as impossible to unearth black money. All large amounts of corrupt money are spread across many fields like increase in cost of living (it can be increased 10 times suddenly and cannot be detected), purchase of fixed assets like flats, lands, gold coins(very small article to hide but very costly) where cash transactions are easy way. A big way to stop this deseasse in India would be to enforce bank draft for property deals compulsorily across India (even remote villages where Agri Land is traded largely as seen by the big crowd in Offices of the Registrars in villages). Pass Book like Banks may be introduced with unique ID to record transaction in Landed Properties for Individuals. Introduce Cash transactions in Malls compulsorily through Adhar Card setting an upper limit for cash transaction per individual.

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AJ

Jan 27, 2014

Generally it is the bureaucracy and the political class who are blamed for the corruption. But it is the business class who are perpetuating corruption by circumventing the various laws in order to save few pennies. The law prescribes certain measures for pollution control and this may involve additional expenditure which the business community not willing to fulfill and then they grease the palms of the the officials to get a clearance for their projects. Here the real culprit is the business community and they go clean and the recipient is wholly and solely blamed. This type of cures are short term measures which within a short period will wear of. We need prevention than cures.

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P V Ranganathan

Jan 26, 2014

The Corrupt have two long months to get all their pre- 2005 currency notes exchanged to the later year versions. This will come in very handy during the forthcoming elections. So the RBI has actually given the corrupt an escape route. I do not think this will in any way reduce corruption

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Neil Joseph

Jan 26, 2014

Replacement of old notes by RBI to reduce corruption!! Read your post twice but cant make the connection.. The security features on the new notes will make counterfeiting difficult not corruption which involves un-documented financial transactions..

Increasingly, I feel the need to avoid the Sunday edition of Daily Reckoning..

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Shekhar MS

Jan 26, 2014

Sir,
Welcome,At last RBI is doing great things to curb black money and corruption. All exchange transactions should be accounted and monitored.

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PASUPATHY C V

Jan 26, 2014

You are wrongly interpreting the matter of notes printed before 2005. The RBI is instructed to banks not to circulate the notes printed before 2005. But it is very difficult task for banks, particularly to RBI/SBI to act because the year of printing is printed in the miidle bottom of the notes As the notes are folded into two then the year falls on theline of folding and get erased. So all notes are fit for public use and banks should decide the act by extra care.

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santosh arora

Jan 26, 2014

if govt of india is serious to remove from the life of every indian then the proposal of withdrawing the 2005 notes to be paid with the rate of extra 5% to depositer. these funds to be deposited in an a/c & no cash transations in cash.the note no is to be added in transaction for the accounting perpose.
It is the fault of Govt & govt must bear the responsibility & implement good intentions for every indian.the notes can be handled same way by post offices, payment of insurances. time has come that the officials of banks 7 employees of bank r to answers for its actions & summerly removed from the post.
introduction of knowledge about every walks of life must be taught in the schools.

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satish Dabholkar

Jan 26, 2014

What about Benami accounts opened by Private Sector Banks without KYC compliance and promises given by the Branches officers of converting black money in the accounts without asking for Pan cards for amount deposited and amount remitted outside the country.
We have not come accross the RBI action as suspending the licenses or compulsorily asking for closing the banks for say three days so that management will become fearful.RBI should have taken strict action to prevent such thing at any time in futuer.but it has not done.

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n k patet

Jan 26, 2014

A great outlet for corruption is that landlords do not give rent receipts; in the event tenants have to give receipts on their behalf. Either HRA rules be amended suitably (so much rent in such and such place depending on "x" salary range allowed without rent receipt) (HRA allows a piddling 3000 p.m. as rent without rent receipt - is the govt aware of the times and the mehagain now!) or force landlords thru law to provide correct rent receipt. food for thought to Kejri/Modi/Rahul.

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Rajanikanta Verma

Jan 26, 2014

On the present occasion, up to 1 July 2014 one can exchange any number of currency notes at the bank without giving any personal details. Therefore, it has no impact on those who have amassed wealth in cash through corrupt practices. Immediate demonetisation with full particulars being required from those exchanging currency notes is required to detect the corrupt.
The present move will only weed out fake currency notes.

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