Role Of RBI And Finance Ministry In Demonetization

Legal framework behind the step:

“What gives the government the powers to declare legal tender illegal?”

Section 26 (2) of RBI Act gives these powers:

(2) On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender 2 [save at such office or agency of the Bank and to such extent as may be specified in the notification].

What is the Central Board? It is the main body of RBI which governs the central bank and has 21 members. These directors are divided into official and non-official:

·         Official Directors

o    Full-time : Governor and not more than four Deputy Governors (which means 5 members)

·         Non-Official Directors

o    Nominated by Government: ten Directors from various fields and two government Official (10 + 2)

So before any decision is taken, the Ministry of Finance had an important role to play in case of the recent demonetisation. According to NDTV reports, Prime Minister Narendra Modi handpicked a trusted bureaucrat, little known outside India's financial circles, to spearhead a radical move to abolish 86 percent of the country's cash overnight and take aim at the huge shadow economy. Hasmukh Adhia, the bureaucrat, and five others privy to the plan were sworn to utmost secrecy, say sources with knowledge of the matter. They were supported by a young team of researchers working in two rooms at Prime Minister Modi's residence, as he plotted his boldest reform since coming to power in 2014. And that’s how the whole plan was charted secretly and the suddenness of the feat was accomplished.  This has been a special case where depending on the need of the situations, guidelines had been changed. Overall we can say, the step to a certain extent was a well calculated one but the execution didn’t go smooth.  The banking officials worked tirelessly day and night, and with a bit of sacrifice from our fellow countrymen, this feat was achieved.