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Is Demonetisation Legal?
Thu, 8 Dec Pre-Open

On the 8th of November 2016 the central government declared Rs 500 and 1000 notes illegal. It was a well-intentioned move and was much appreciated. Some even considered it an event that would bring structural changes to the Indian economy.

The government thought the unreturned money would be a dividend for the government from RBI.

However, the execution of this drastic move has brought up concerns, one could even say it has created chaos. People are plum out of cash. The economy is swiftly heading for a slowdown. Reality is turning out to be painful.

To make matters worse, the government's estimates about the unaccounted money have been completely off the mark. It was expected that a big chunk of the total Rs 15 trillion of high denomination notes would not return to the banking system. However, that number has already crossed Rs 10 trillion.

Some think demonetisation is the biggest failed economic experiment in history, and they could be right. The execution certainly has been messy, and only time will tell the long-term impact it will leave on the economy.

But, there is another serious question about demonetization we must consider...

Is demonetisation legal?

Every currency note carries the RBI's promise to pay the bearer the amount of value of the note. This pledge is signed by the honorable governor of the central bank.

If the RBI fails to do that, it is considered a default by the RBI.

Can a mere declaration by the government nullify the pledge of the RBI governor to pay? In fact, unless the RBI Act is not amended, the RBI must be liable for the old notes even after 30th December 2016.

The government and central bank want to amend the RBI Act, of course. However, this can only be done after 30th December, when we know the exact state of unreturned currency.

And as we know the ongoing parliament session ends on 16th December, leaving the central bank only the Ordinance route to amend the act.

Until the ordinance is passed, the RBI is legally bound to fulfill its promise to pay.

We believe the central bank has an important role to play in the country's current situation.

After a disappointing start by imposing the 100% CRR on fresh bank deposits.

Yesterday, in the Monetary policy meeting (MPC) RBI decided to keep the repo rate unchanged at 6.25%.

The unchanged rate does not bother us. What bother us is the way our new governor refused to talk about the demonetisation.

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Nov 20, 2017 (Close)