RBI says it recommended demonetisation of Rs 500, Rs 1,000 notes on government's 'advice'

Contrary to popular belief, it was the government which had "advised" the Reserve Bank to junk Rs 500 and Rs 1,000 notes on November 7 and the board of the central bank the very next day recommended the demonetisation.

In a 7-page note to Parliament's Department-Related Committee of Finance headed by Congress leader M Veerappa Moily, the RBI stated that the government had on November 7, 2016 "advised the Reserve Bank 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."

The RBI's Central Board met the very next day to "consider the government's advice" and after "deliberations" decided to "recommend to Central Government that the legal tender status of the banknotes in the high denominations of Rs 500 and Rs 1000 be withdrawn."

Union Cabinet headed by Prime Minister Narendra Modi met within hours of that recommendation on November 8 and banned circulation of old 500 and 1000 rupee notes.

Some ministers have thus far maintained that the government had only acted on RBI recommendation of demonetisation.

In the note to the panel, 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.

In parallel, the government had been taking steps to curb black money and combat terrorism.

"There were reports by intelligence and enforcement agencies that availability of high denomination banknotes made it easier for black money hoarders and counterfeited notes in high denominations were being used for terrorist financing," the RBI said.

"It occurred to Government of India and the Reserve Bank that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all the three problems of counterfeiting, terrorist financing and black money by demonetising the banknotes in high denominations of Rs 500 and Rs 1,000 or by withdrawing legal tender status of such banknotes...

"Though no firm decision was taken initially, whether to demonetise or not, preparations still went on for introduction of new series notes, as that was needed in any case," the note said.

The central bank said it had as early as October 7, 2014 suggested to the government the need for introduction of 5,000 and 10,000 rupee notes, keeping in mind the inflation and the need for "facilitating payments and managing the currency logistics".

The government, it said, concurred with the introduction of Rs 2000 notes on May 18, 2016.