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In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand

Mar 13, 2019

Vivek Kaul

The Reserve Bank of India (RBI) has finally released the minutes of the 561st meeting of its Central Board of Directors held on November 8, 2016, at 5.30 PM. The minutes make for a very interesting reading. Let's take a look at this pointwise.

1) The meeting was held at 5.30 PM, just about two and a half hours before the prime minister Narendra Modi, announced to the nation that Rs 500 and Rs 1,000 notes were being demonetised.

What this tells us is that the RBI board met almost at the last moment and by the time PM Modi had already made his decision to go ahead and demonetise 86% of India's currency in circulation. The interesting thing is that the minutes are dated December 15, 2016, which is 38 days after demonetisation was announced.

2) The minutes of the meeting tell us that the RBI Board was informed of a steep rise in Rs 500 and Rs 1,000 notes, by the government. Between 2011-12 and 2015-16, the number of Rs 500 and Rs 1,000 notes had grown by 76.38% and 108.98%, respectively. This, despite the fact that the Indian economy had grown by 30% during the period.

This was used as evidence by the government to say that the high denomination notes were being used to accumulate black money, "since transactions made in cash do not leave any audit trail".

3) The core argument of the government, about the currency in circulation (or the number of Rs 500 and Rs 1,000 notes) rising faster than economic growth, was basically wrong. And the RBI Board pointed this out to the government. It said, "the growth rate of economy mentioned is the real rate while the growth in currency in circulation is nominal".

This is the most interesting bit of the minutes that have been released. It tells us that the babus in the government do not know the difference between real growth and nominal growth. And that's very disturbing.

Let's get into this in a little more detail. The Indian GDP in 2011-12, in nominal terms, not adjusted for inflation, was Rs 87.36 lakh crore. By 2015-16, it had grown to Rs 137.72 lakh crore. This was an increase of around 58%.

In comparison, the Rs 500 and Rs 1,000 notes went up by 76.38% and 108.98%, which sounds quite a lot. But here we are comparing just Rs 500 and Rs 1,000 notes, but there are notes of other denominations as well.

The total value of notes of various denominations as of March 2012 had stood at Rs 10.53 lakh crore. By March 2016, this had jumped to Rs 16.42 lakh crore. This was a jump of around 56%.

Hence, the economy had grown by 58% and the value of notes of various denomination had grown by 56%. There was absolutely no problem on this front, and which is precisely what the RBI Board told the government.

4) The government also told RBI Board that "the incidence of counterfeiting is also on the rise in these two denominations [Rs 500 and Rs 1,000]." The government put the estimate of the total counterfeit currency in the country at Rs 400 crore.

As mentioned earlier, the value of the notes of various denominations, or the currency in circulation, in March 2016, had stood at Rs 16.42 lakh crore. By November 2016, before demonetisaiton happened, this had grown to Rs 17.97 lakh crore. Hence, Rs 400 crore of counterfeit money, worked out to around 0.02% of the currency in circulation.

As the RBI Board rightly put it, "Rs 400 crore as a percentage of total quantum of currency in circulation in the country is not very significant."

5) Also, the government told the RBI Board, "cash has always been a facilitator of black money, since transactions carried out in cash do not leave an audit trail". This is again a very fundamental mistake. While cash may be a facilitator of black transactions, a very small portion of black wealth is actually held in the form of cash. If the government had chosen to take a look at the data put out in the White Paper on Black Money published in May 2012, it wouldn't have made this mistake.

As per this report, cash, on an average, formed only 4.9% of the total unaccounted money admitted to in search and seizure operations (euphemism for income tax raids) carried out by the Income Tax Department. This data was for years between 2006-07 and 2011-12.

Not surprisingly, the RBI Board told the government that black money was primarily helped in the form of gold and real estate and "this move [demonetisation] would not have a material impact on those assets."

6) After pointing out these negatives the RBI Board told the government: "The Board considered the memorandum and after detailed deliberations concluded that in larger public interest, the balance of the advantage would lie in withdrawal of legal tender status of Rs 500 and Rs 1,000 currency notes currently in circulation."

After reading the minutes of the meeting and what the RBI Board had to say about it, it made me feel somewhat like this: When it came to the demonetisation question, the RBI behaved like an old uncle who made his nephew or niece aware of the negative repercussions of a stupid decision that he or she was about to make, but then in the end went on to say that, if that is what you want to do, who am I to oppose it. You have my full support.

7) The government would have gone ahead and done what it wanted to do irrespective of what the RBI had to say. But if the RBI had taken a slightly firmer stand it would have been in a better position in the days to come. Urjit Patel wouldn't have to quit as RBI Governor. And a post graduate in history wouldn't have been offered the position of the RBI Governor.

Now only if wishes were horses, beggars would ride!


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

PS: Now you can follow Vivek Kaul on Social Media and get Vivek's updates on the critical issues affecting the economy and your wallet... as they happen. Follow Vivek on Facebook, Twitter, and Google+.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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7 Responses to "In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand"

Rajeev Kapur

Jul 7, 2019

Vivek is courageous and has done a brilliant analysis. Well done.

Like (1)


Mar 22, 2019

"...Not surprisingly, the RBI Board told the government that black money was primarily helped in the form of gold and real estate .." Typo error : should be 'held' instead of ' helped '. My mother had kept Rs2000/- aside before death. I discovered it just after last date for deposit of old notes was over. I sought help from my bank manager but she had an identical story to tell with double the amount ! Then I tweeted to PM , Jaitleyji , and others offering to donate that money to Sainik Kosh. At least the hard earned money would go for a noble cause. I expressed my desire to forgo tax benefits and even suggested that boxes be kept in RBI or SBI Main branch to collect the money . There was no reply / no action from any of them.

Like (1)

Rajendran Thuruthiyil

Mar 19, 2019

Sachai kaduva hotta hai bhai. At the end somebody has to say that "the king is naked"

Like (1)

Jayant Gharpure

Mar 14, 2019

MR Surendranath has made very Valid point. Printing of New notes could not have been Printed in sufficient numbers in 3 days. .

Like (1)

Jayant Gharpure

Mar 13, 2019

What is new thought you are presenting?Rbi's nod was there albiet reluctant is already known.whatever you economist propogateing there is fact that sizeable black money is held in black.otherwise you how one explains such large amounts were deposited in accounts.Why don't u find out what is outcome of 3lac cases where average deposit was 80 Lacs as disclosed by FM in loksabha .who keeps such large amount in cash? It is also surprising that RBI doesn't have data about cash deposits made under 23transaction types permitted in old currency.Also Govt erred in announcing scrutiny exemption for deposit upto 2.5 Lacs & allowing multiple. Deposits.

Like (1)

Ajay Barchha

Mar 13, 2019

You seem to dislike almost all the major decisions taken by the Modi Government. I guess nobody is perfect. If intent is not wrong and not selfish, such difficult decisions are worth trying.

Like (3)

S Surendranath

Mar 13, 2019

all said and done... there is some catch behind RBI putting up a face of innocent boy... Rs.2000/- & New 500 notes - obviously must have been printed and kept in stock for release much..much before the announcement of 8th Nov. The only logical conclusion of this is that the idea of demonetisation is not taken in a matter of two hours of meeting on 08th Nov evening.. but was contemplated much...much before.. What did RBI say when the New currencies were ordered to be printed...??? The meeting on 08th Nov evening more sensibly and logically called for to make announcement rather than arrive at a policy decision.. Now.. after all this.. coming out with various statements is only to prove that.... "bad cause needs much defence"

Like (1)
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