RBI: Okayed note ban to check fake money

NEW DELHI: The Reserve Bank of India (RBI) accepted the government’s proposal to recall ₹500 and ₹1000 notes last November because it was getting “increasingly difficult” to identify genuine notes from the fake ones, the Central bank has informed a parliamentary panel.

The demonetization decision, announced by Prime Minister Narendra Modi in a televised address to the nation ion November 8, shook up the nation as millions had to stand in queues for hours outside ATM vending machines that were often depleted of cash.

In a note to the parliamentary standing committee on finance recently, the Central bank quoted the government as stating in its reference that counterfeit notes were being used for financing activities such as drug trafficking and terrorism and withdrawal of high-value notes could be a solution to it.

“RBI, on its part, found that counterfeit notes of ₹500 and ₹1000 denominations have been largely in circulation and it was becoming increasingly difficult to identify genuine bank notes from the fake ones. RBI saw an opportunity to put an end to the menace of counterfeit notes, particularly when the introduction of new design notes was in the offing,” the RBI told the parliamentary panel.

While securing the bank notes against counterfeiting was cited as the objective of the withdrawal of 17,165 million pieces of ₹500 and 6,858 million pieces of ₹1000 notes—valued at ₹15.44 lakh crore—there was no official estimation of the fake notes in circulation.

“Estimating counterfeit notes in the hands of the public is a difficult proposition. However, a study conducted by Indian Statistical Institute, Kolkata, on statistical estimation of counterfeit notes indicated that FICN in circulation was approximately Rs 400 crore and around Rs 70 crore was being pumped into the system annually,” the RBI said.

At a meeting of the parliamentary committee on January 18 this year, MPs had grilled RBI governor Urjit Patel about the rationale and impact of demonetisation. Former prime minister Manmohan Singh had bailed out Patel by saying that he didn’t have to answer all questions, but the RBI governor was asked to provide answers in writing later. The Central bank furnished the replies in a note recently. The panel has summoned Patel on May 25 for deposition. On whether demonetisation would curtail black money, RBI stated, “Government may be best placed to reply to this.”

It said that the discussion with the government on the possibility of demonetisation had started in early 2016. The approval for introduction of ₹2000 note and new design ₹500 was received from the government on June 7, 2016.

To another query whether the views of the chief economic advisor and the finance minister were taken before the announcement of the decision, the RBI said, “Government may be best placed to answer this question.”

The Central bank said that there was a continuous process of engagement with the government before the final announcement but no formal minutes were recorded.

It did not provide the exact amount of money that returned to the banking system post-demonetisation, explaining that it was taking all steps expeditiously to release the figures.