Note ban: RBI will honor payment of demonetised currencies, but countering counterfeit notes to remain a challenge

Many in the opposition including the Congress and AAP are going to town and spreading the myth that despite the 30 December, 2016 deadline to deposit the demonetised currency notes namely of Rs 500 and Rs 1,000 denominations, one can anytime thereafter present the demonetised notes before the Reserve Bank of India (RBI). And the RBI, they assert smugly, would be obliged to pay the sum of Rs 500 or Rs 1,000 as the case may be according as which demonetised note is so presented. They pompously cite the promise made by the governor of the RBI on the currency notes to pay the bearers the sum specified therein.

The RBI logo. Reuters

The RBI logo. Reuters

A currency note is quintessentially a promissory note. And a promissory note is a compromise between the informality of an IOU and the rigidity of a loan agreement. The promise made by the RBI governor is made in rem i.e. to the world at large. “I promise to pay the bearer the sum of one hundred rupees” is the promise made by the governor on a one hundred rupee note. The same promise is made for rupees two thousand in the recently launched Rs 2,000 note.

The promise to be sure is open-ended and not limited to a period of time. And this has presumably emboldened the rebellious thought that one can thumb his nose at the recent demonetisation and smugly present himself before the RBI with a wad or sacks of demonetised currency notes which would have no choice but to pay up even after the 30 December, 2016 deadline.

One should not forget that a currency note is fungible. In other words, if I deposit a Rs 100 note with a bank, all that I can ask for is withdrawal of Rs 100. I cannot ask for the return of the same currency note. This is what fungibility is all about.

The innate principle of fungibility that marks a currency note extends to the RBI’s power to manage currency notes in the country.

The RBI website gives a graphic account of the currency regime. The Reserve Bank of India Act, 1934 vests the RBI to print currency notes in the denominations specified by the central government. All these reinforce the view that while the RBI is bound by its promise to pay the bearer the sum specified in the currency note, it is not bound to keep the same note in circulation. The central government is empowered to decide upon the denominations from time to time.

In the ongoing demonetisation exercise, all that the government has done is not to renege on its promise to pay but to ask the bearers of the demonetised notes to either exchange them for notes that are still legal tender or deposit them into one’s bank account,  both within the dates specified. The exchange counter to be sure was limited both in terms of the shortness of duration i.e. a fortnight as well as the smallness of the amount permitted but no one can make a grievance out of it because the government has given an alternative---deposit the demonetised notes without any limit into one’s bank account by 30 December, 2016, an ample period of 50 days starting from 10 November, 2016.

No one can make a virtue of his own passivity, his unwillingness to bestir either for the purpose of exchange or deposit. If he refuses to bestir he does so at his own peril. He cannot plonk himself before the RBI at any time he chooses thereafter to demand the sum specified in the demonetised notes. If his conscience is clear he must deposit the demonetised currency notes and offer explanation if asked for about the source. If his conscience is not clear or his explanation is suspect, he runs the risk of being proceeded against. The government is offering a via media for those whose conscience is not clear but who do not like to be proceeded against---cough up 50 percent as tax plus penalty in what could be yet another amnesty scheme.

In short, the promise made on currency notes is sacrosanct, but equally sacrosanct is the principle of fungibility. The government and the RBI have the power to issue a new currency in lieu of the existing one. In the absence of the principle of fungibility, the government and the RBI would not be able to counter counterfeit notes and other evils paper currencies bring with them.