The government's move towards demonetisation was considered to be 'commendable' by the Reserve Bank of India (RBI). However, the central bank had reservations about it being able to weed out black money and counterfeit notes. The minutes of the 561st meeting of the RBI's Central Board, held at 5.30 pm on 8 November 2016 reveal that the central bank directors had cautioned the government that demonetisation "will have a short-term negative effect on the GDP for the current year", according to an Indian Express report.
Urjit Patel, the RBI governor, signed the minutes of the meeting only on 15 December 2016 -- five weeks after the meeting was held, the IE report said.
The RBI, however, had some reservations about demonetisation:
Curbing black money: The RBI Board pointed out that a large section of the black money was not held in cash but in the form of other assets, viz. realty, gold, etc. Hence, demonetisation would not have a 'material impact' on them, the IE report said.
Fake currency: The Ministry told the RBI board that counterfeiting of Rs 1,000 and Rs 500 notes was on the rise and estimated the total number of such currency to be around Rs 400 crore. While agreeing that counterfeiting was a concern, the RBI was of the view that Rs 400 crore as a percentage of total quantum of currency in circulation in the country was 'not very significant', the report said.
The Board said that economic growth and linkage to high denomination currency in the government proposal was flawed as the rate of inflation was not factored in, the report pointed out.
Two sectors would be severely impacted by demonetisation, the RBI Board pointed out, viz, medical stores, tourism. The Board mentioned in writing to the government about this, the report said. Those travelling long distance would be carrying high denomination notes and would be put to hardship by the note ban, the RBI said. Hence, it asked for private medical stores to be included in the exemption list.
With respect to the digital economy, Patel had stated that government's proposed step would present a big opportunity to take forward financial inclusion and incentivising use of electronic modes of payment.
According to the report, the minutes included an 'assurance' that the move was under discussion between the Centre and the RBI for six months during which 'most of these issues had been discussed'.
While the RBI board approved the move, the minutes stated that the Board was assured that the Government would take mitigating measures to contain the use of cash.