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Has Independence of RBI been compromised due to Demonetization


Introduction

The recent demonetization drive announced by Prime Minister Mr. Narendra Modi along with Finance Ministry has raised questions about the autonomy of RBI. The demonetization announcement was taken without the consultation of RBI and this led to press releases and statements by bank unions stating that independence of RBI has been compromised. The main factors questioning the independence of RBI in the demonetization drive include conflict in statements between Finance ministry and RBI, reversal of demonetization rules, lack of effective communication on deadline of cash crunch, no reports of RBI on demonetization consequences etc.

Conflict between Finance ministry and RBI statements

Bank Unions criticized that Finance Ministry had the full control over RBI during the demonetization drive thereby indulging in the independence of RBI. The statements released by the finance ministry and RBI were in conflict to each other. Finance ministry released a statement that salaried people can withdraw up to 24000 rupees but in banks only 4500 rupees were given in the month of December. People were confused to the core and the queues before banks got extended day by day leading to conflicts between public and bank officials.

Reversal of demonetization rules

During demonetization, rules were amended and taken back on a daily basis. RBI earlier informed that old currency will be exchanged in their branch offices till March 2017 but it got reversed and deadline was fixed at 31st December 2016. Only people with documents for traveling abroad during November and December were eligible to exchange their old currency till March 2017. This created panic among the public and many were left without exchanging their old currency.

Lack of effective communication

The press releases of finance ministry regarding the availability of 500 rupee denominations and ATM calibration were in direct conflict with the RBI actions during the month of November. Prime Minister Mr. Modi announced that the cash crunch problem will be solved within 50 days but still now, the problems of demonetization exist. The deadline was not met with people losing confidence in the assurance given by Prime Minister but instead now the government urges public to go cash less using digital payments. ATM Machines of most of the banks are still out of order. Public has faced severe discrepancies due to this miscommunication. This indicates that there is a clear lack of communication between government and RBI regarding the cash crunch problem and deadline assured.

No reports of RBI on demonetization consequences

RBI has released no official reports yet on the demonetization consequences. The monetary policy and inflation targets as a result of demonetization and the impact on the Indian economy as a whole are to be revealed by RBI. Several income tax raids were conducted with key persons getting arrested. Parliament also enquired about the demonetization drive with the RBI Governor Urjit Patel recently with a flurry of questions from the members. RBI governor has replied that plan was formulated a year ago and about 9 lakh crore new rupees were printed. Dr. Man Mohan Singh came to the rescue of the RBI governor and stated that RBI need not answer questions that will affect the independence of RBI. There is still no official report from RBI on the black money recovered by the demonetization drive. Critics argue that government has suppressed RBI from releasing any official reports limiting its autonomy.

Conclusion

Demonetization drive has created panic everywhere in India and RBI was under radar for the past few months. Confusion, speculations and panic has prevailed among public with daily announcements and rules as a result of demonetization drive. Finance Ministry has recently declared that it respects the autonomy of RBI. It is in consultation with RBI on matters of public importance. Finance ministry press release states that demonetization was mandated by law and this move should not be taken as an infringement on the independence of RBI. This statement by finance ministry brought an end to the speculation of government indulging in the independence of RBI. However, an official report from RBI will ward off all the speculations regarding the autonomy of RBI entirely.

-Mr. Durai. P