The Reserve Bank of India (RBI) recommended demonetisation of 500- and 1,000-rupee banknotes hours before Prime Minister Narendra Modi announced the surprise move in a televised address to the nation in the evening of November 8.
The government and the RBI have kept the consultation process that led to the decision to demonetise 86% of India’s cash in circulation a closely-guarded secret. Both, however, have insisted that the demonetisation plan had been under discussion for long and consultations were being held.
Economic affairs secretary Shaktikanta Das told reporters on November 8 that there was “no need to go into the process which led to this decision. I think what we should be focusing on is the outcome and the decision itself”.
The government’s shock move has led to a severe cash crunch, forcing millions of people to line up at banks and ATM kiosks for more than a month. Cash withdrawals have been restricted, but most banks are unable to provide even that. The Opposition’s protests over the demonetisation move have washed out the winter session of Parliament.
The Reserve Bank of India Act, 1934, empowers the Union government to demonetise any series of banknotes. The government, however, cannot take this decision on its own, but only on the recommendation of the RBI’s central board.
In response to a right to information request, which Hindustan Times has sought, the RBI said the bank’s central board of directors made the recommendation at its meeting in New Delhi on November 8. Only eight of the 10 board members attended the crucial meet.
Apart from RBI chief Urjit Patel and economic affairs secretary Das, the meeting had RBI deputy governors R Gandhi and SS Mundra, Nachiket M Mor, the country director for the Bill and Melinda Gates Foundation, Bharat Narotam Doshi, former chairman of Mahindra and Mahindra Financial Services Limited, former Gujarat chief secretary Sudhir Mankad, and financial services secretary Anjuly Chib Duggal.
The law provides for a 21-member board, including 14 independent members, but the central bank has been operating with less than half.
Between the RBI board meeting and Modi’s demonetisation announcement, the government just had a couple of hours to process the bank’s formal recommendation.
Prime Minister Modi had convened a meeting of his cabinet later in the day when they were told about the decision. The ministers — who had to leave their mobile phones outside — were told to stay back till his address was telecast.
It isn’t that the RBI or the government hadn’t been making preparations for the mammoth notes recall exercise. The bank had already printed Rs 4.94 lakh crore in Rs 2,000 notes by November 8.
But former RBI officials said this implies that the board’s approval was a formality.
The way the demonetisation decision was taken was “highly irregular”, said a former top RBI official, who didn’t wish to be named. He said he did not believe the government and RBI had taken “adequate steps” to minimise harassment of people.
Another said he was concerned at the large number of vacancies in the central board. Of the 14 independent directors, the board has just four.
“According to the RTI reply, only three of them were present (at the meeting). That is the quorum,” he said.