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India’s demonetisation continues to spark controversy

Categories : Cash covers a broad range of transactions, Cash is universal
February 8, 2017
Published in : Central Bank, India, Uncertainty, Usage
There is still great controversy in the way India's demonitisation was carried out and many are concerned about the long term consequences this decision might have on the economy.
Communication Team

The Reserve Bank of India (RBI) faces continuous criticism since the demonetisation of its two highest banknotes announced last November. Indeed, the central bank’s independence from the government was largely questioned after the move and officials, including former RBI governors, demonstrated their dissatisfaction regarding the decision. According to BloombergMarkets, the RBI approved the ban only a few hours before the Prime Minister’s official speech and had never discussed the matter previously. In addition, the government is believed to have advised the RBI to withdraw the two denominations (Rs 500 and Rs 1,000) only one day before the public announcement. 

The mystery over this move deepens as the RBI refuses to answer numerous questions regarding the process and consequences of the withdrawal. Indeed, the central bank stated that they do not know how many banknotes have been deposited at commercial banks, and gave inconsistent responses when asked if some board members were opposed to the decision. Finally, the RBI claimed exemption for all the questions regarding the technical details of the demonetisation and the studies that were used to forecast the impact of the move.

The Supreme Court has been seized by the opposition to examine the legal aspect of this matter. Nevertheless, it has been already demonstrated that the RBI Act allows the government to direct the central bank when the public interest so requires.

Former Prime Minister Manmohan Singh (2004-2014) recently declared that this move will lead to an economic disaster and economists indeed predict that India’s growth will decrease from 7.6% in 2015 to 6.8% this year through March.

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