RBI cites threat to life, national security as Modi’s note-ban mystery deepens

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New Delhi: The Reserve Bank of India (RBI) refused to share specific details of Prime Minister Narendra Modi’s ban on high-value banknotes citing danger to life and national security, as the mystery deepens over who took the unprecedented decision.

The Reserve Bank of India recommended the move, which was accepted by the cabinet and announced by Modi on 8 November, power minister Piyush Goyal told Parliament in November. The RBI board approved the ban three hours before Modi’s speech and hadn’t discussed the matter before, a slew of responses to Bloomberg News’s Right to Information (RTI) requests show.

However, the RBI told a lawmakers’ panel this week that the government had “advised” the monetary authority to “consider” the ban a day before the RBI board made its recommendation. The government then “considered the recommendations” and decided to withdraw the notes, culminating in Modi’s address that blindsided the nation.

The cloak of secrecy that has shrouded the currency ban decision is likely to bolster the view that authorities, both on Mint Street and in New Delhi, were not prepared for such a decision and the way it was announced. It risks undermining perceptions of the central bank’s independence and raises questions about Modi’s decision-making style and his communication with the RBI.

More clarity may emerge when RBI Governor Urjit Patel deposes before a parliamentary committee on 20 January. Details are essential to help assess the success of the shock move as well as gauge the impact of the decision on Indian economy.

“It is very perplexing that the RBI doesn’t answer questions about how the decision was arrived at,” said Shilan Shah, Singapore-based Indian economist at Capital Economics. “There are concerns that in the whole process the RBI has been sidelined by the government and that raises questions about its independence,” he said, adding that authorities have not been transparent.

The use of those specific exemptions are “perplexing,” Capital Economics’s Shah said. Shailesh Gandhi, a former bureaucrat with the Central Information Commission, told FirstPost website on 31 December that the RBI’s attitude of stonewalling smacked of “sheer arrogance.”

“What the RBI is doing by refusing to answer queries under RTI is denying citizens their fundamental rights,” Gandhi said.

Parliament push

Lawmakers are also seeking answers. Parliament was gridlocked as the opposition demanded discussions and voting on the measures, the Supreme Court is hearing petitions against the legality of the steps, and two lawmaker panels have sought explanations from the RBI.

The decision to demonetize was taken only when the stock of new currency notes was reaching a “critical minimum,” enough to meet a significant part of demand, the RBI told a panel in a note accessed by Bloomberg News. About Rs4.6 trillion of notes had been issued a month into the program, RBI data show, less than a third of the Rs15.4 trillion sucked out by the 8 November demonetization.

However, the currency swap was riddled with rule changes and data that analysts have questioned. Patel will depose before another lawmaker panel on 20 January, which is expected to seek his view on the impact of the demonetization on India’s economy.

“The institutional identity of the RBI has been damaged,” former Governor Yaga Venugopal Reddy told CNBC this week. Rahul Gandhi, a leader of the main opposition Congress party, repeated the accusation, attacking Modi for ruining the credibility of the central bank.

Complete concurrence

A decision of this magnitude involves both the government and the RBI, and the RBI Act allows the government to direct the RBI on matters of public interest, said GVLN Narasimha Rao, a spokesman for Modi’s Bharatiya Janata Party. “So the decision has to be a government decision taken by the Prime Minister. I am sure he has consulted with the RBI and others before he took the decision,” Rao said. Two calls and a text message to Modi’s office went unanswered.

Neither Modi nor his ministers have disclosed the names of their advisers. The RBI has already told Bloomberg News that its board didn’t discuss demonetization before 8 November.

“I repeat, the RBI is in complete concurrence with the government. There is no disharmony. There is no disagreement,” Rao said. “Anyone who thinks that the RBI was not a party to the decision is lying deliberately and mischievously.”

Economic shock

Economists say the shock of the demonetization will push India’s growth down to 6.8 percent in the year through March from 7.6% the previous year. While supporters say it will help curb tax evasion and graft, critics point to reports of job losses and a slump in demand in a market where 98 percent of consumer transactions are made in cash.

The RBI board meeting on 8 November to discuss demonetization and its impacts lasted not more than 30 minutes, former finance minister Palaniappan Chidambaram said in televised comments on Wednesday. He added that when his Congress party sought the agenda and minutes of the meeting, the RBI declined to make them available.

“The government and RBI have differences,” Chidambaram said. But “never before in India’s history has such a farce been enacted.”