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Demonetisation: Is the RBI really autonomous?

11 January, 2017

Whose decision was it really to demonetise Rs 500 and Rs 1,000 notes on 8 November last year?

Comments by at least two former governors of the Reserve Bank of India (RBI) added more fuel to a debate on whether the central bank’s autonomy was impeded by the government in the wake of the decision that sucked 86% of the currency out of the system.

On Tuesday, in an interview to CNBC TV18, former RBI governor Bimal Jalan said that the central bank’s autonomy “is a very fundamental fact and we have to maintain it”. 

Jalan’s comments follow those made by another former central bank chief YV Reddy, who said on Monday that the RBI’s autonomy had eroded and that its reputation had been threatened by recent criticism from the ratings firms. 

These comments come just as the RBI told a parliamentary panel on Tuesday that the decision on notes ban was taken on the “advice” of the government. In a seven-page note submitted before a parliamentary standing committee on finance, the RBI said that the government’s advice was conveyed to it on 7 November 2016, just a day before Prime Minister Narendra Modi made it public in a televised address. 

“The central board of the RBI met on November 8, 2016. The board noted that a summary measure in the form of withdrawal of legal tender character of these… notes to contain the menace of counterfeit notes is proposed by the government,” a report by The Times of India cited the RBI as having told the panel. 

Interestingly, the government had earlier said that the decision to demonetise Rs 500 and Rs 1,000 notes had been taken on the recommendation of the central bank. 

The Indian Express had cited union coal and power minister Piyush Goyal as telling parliament during a debate on demonetisation in November that the RBI board had taken this decision and sent it for the government’s approval. 

The Times of India report, however, cited unnamed government officials as saying that there was no discrepancy between the government’s and the RBI’s responses. This was because only the formal decision on demonetisation was taken on 7-8 November and the exercise had been underway since May last year, with the central bank recommending the introduction of a new series of banknotes and a new Rs 2,000 note.  

“Though no firm decision was taken initially, whether to demonetise or not, preparations still went on for introduction of new series of notes, as that was needed in any case,” the RBI told the house panel, according to The Times of India.

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Demonetisation: Is the RBI really autonomous?

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