The Reserve Bank of India (RBI) has done well by removing restrictions on deposits above Rs 5,000 for the remaining days of this month when the deadline to surrender old, invalidated currency expires.
Though Wednesday’s RBI notification is silent on the reasons for reversing the move, it is obvious that the decision is triggered by widespread criticism against its earlier directive that required anyone who wanted to deposit over Rs 5,000 in old currency to face questions by two bank officials on why he/she didn’t do it earlier.
Even if one makes multiple deposits that add up to more than Rs 5,000, the restrictions would have kicked in.
This was a breach of promise and lacked logic as this writer said in an earlier Firstpost column.
The new RBI notification, which says the old directive will not apply for KYC compliant accounts, would mean that almost all genuine customers will escape the unnecessary scrutiny, since majority of bank accounts are now KYC compliant. The only exceptions, perhaps, are Jan Dhan accounts which were opened with loose KYC norms and fraudsters.
The Rs 5,000 limit was absurd looking at the purpose (tackling tax cheats) from any angle. Any large deposit in any kind of account should naturally trigger scrutiny by bankers and taxmen to check likely money laundering. For this the government and the RBI didn’t need to trouble all customers and bank officials at a time when the common man is already feeling the pain of an artificial cash crunch.
Besides, such a restriction contradicted the repeated promises of Prime Minister Narendra Modi and Finance Minister Arun Jaitley that people do not need to rush to bank branches to deposit their old currency since there is time till 30 December.
In hindsight, the many flip-flops by the RBI and the government show the lack of planning and coordination among the top authorities who handle the demonetisation implementation. There are reasons to believe that the central bank isn’t in control of the situation and experts have pointed fingers at the erosion in the credibility of the central bank, an institution that is known for its ability to drive the economy through even worse phases with skill and conviction.
It was clear the Rs 5,000 deposit rules will hit the common man hard. Those who would have waited for the queues at the banks to get shorten to deposit their old currency savings, were taken by surprise with this rule. Remember, a number of time rules have changed for the common citizens on cash withdrawals and deposits. Last month, the government had abruptly stopped the currency exchange facility at bank counters after initially promising until 30 December. Bankers, at one point, even inked customers to ensure people don’t withdraw cash beyond certain specific limits, reminding one of war-time rationing. All this created more panic and confusion among the public.
Demonetisation, in the scale the Narendra Modi government has undertaken (pulling out 86 percent of the currency in circulation), has no parallel among major economies.
The entire world is watching this episode in India as a rare case study of a botched up economic reform plan. No one has a clue on where this is taking the Indian economy - the fastest growing major economy in the world - in the days ahead. In this backdrop, there is a closer scrutiny on the Indian central bank and government by global economy watchers and investors on each and every stage of demonetisation.
Here frequent flip-flops in rules only does damage to the credibility of the economy and its political and economic institutions.
As of now, there are a few missing links in the demonetisation plan that the central bank needs to clarify, including the number of new Rs 500 and Rs 2,000 notes printed, giving guidance to the public on until when the cash crunch will last and what is the cost of the exercise to the economy.
Except for assurances there is enough cash in the system, the RBI hasn’t offered specific details of the currency operation that is underway to ease panic. The RBI assurances do not reflect on the ground as still ATMs run dry and bank branches ration money. So far, since the 8 November demonetisation announcement, there have been 60 circulars issued by the finance ministry and the RBI. This points to a lack of planning and hold of the situation.
The RBI should make up its mind and guide the economy and the general public through this uncertain phase. Though demonetisation began as a political decision, the responsibility to ensure that this does not harm multiple spheres of the economy equally lies with the central bank which is the authority of monetary policy and currency in circulation. It’s high time the RBI came out of the trance and took control of the situation.
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Updated Date: Dec 21, 2016 15:27:06 IST