Demonetisation: Why RBI's new withdrawal rules lack logic and are discriminatory

On Monday, a late night press release from the Reserve Bank of India (RBI) took everyone by surprise. The release read thus: “As it is impeding active circulation of currency notes, it has been decided, on careful consideration, to allow withdrawals of deposits made in current legal tender notes on or after November 29, 2016 beyond the current limits; preferably, available higher denominations bank notes of Rs 2000 and Rs 500 are to be issued for such withdrawals”. To put it in simple words, if you deposit money in ‘acceptable’ currency denominations, you can withdraw beyond the current weekly withdrawal limit of Rs 24,000.

 Demonetisation: Why RBIs new withdrawal rules lack logic and are discriminatory

RBI Governor Urjit Patel. File photo. PTI

Legal tender

Now, what are the legal tenders currently?

Going by the 8 November televised speech of Prime Minister Narendra Modi, old notes of Rs 500, Rs 1,000 notes ceased to be legal tender from midnight. “To break the grip of corruption and black money, we have decided that the 500 rupee and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight tonight that is 8th November 2016,” the PM said announcing one of the biggest demonetisation exercises in the country since the 1978 crackdown by Morarji Desai government.

But, Rs 500 and Rs 1,000 notes are banned only from transactions but are still 'legal' enough to be accepted at bank counters in the form of deposits until 30 December. The question is, will such deposits too qualify for higher withdrawal limits or does the RBI notification refer to only deposits made in currency denominations that are in use (denominations of Rs 100 and below and new Rs 200, Rs 500 currency notes). There needs to be clarity on this aspect.

Reason: If the latter is the case, the RBI is treating customers differently based on the type of notes they deposit, even though both sets carry the same promise to the bearer as offered by the constitution. One customer who deposits his old currencies faces restrictions on withdrawal and the other with new currency notes gets unlimited withdrawal facility. Is that the case here?

An email sent to the RBI spokesperson seeking clarity on the press release remained unanswered at the time of writing this piece.

However, a senior banking industry official clarified that the current limits are Rs 24,000 a week. "But if you deposit some amount in legal tender you can withdraw that amount over and above this limit. For instance, if you have deposited Rs 10,000 of which Rs 6,000 is old notes and Rs 4,000 in legal tender - Rs 10/20/50/100/500/2000 - you can withdraw that additional 4000," the official said.

There are two logical questions that arise:

First, at a time when currency in existing lower denominations (Rs 100, Rs 50 and Rs 10) is a luxury and the new ones (new notes of Rs 2,000 and Rs 500) a rarity, why would someone deposit cash in these denominations in a bank? Those who have the first lot will preserve it for use and the second lot -- who acquired them after standing for hours in long queues -- will be very cautious with it.Even otherwise, there are withdrawal restrictions on new currency from ATMs and bank branches. There are still many ATMs even today that have shut shop. Someone should have to be out of their minds to deposit “hard earned” money back to the bank in these times. Even those who get salary in cash (mostly low-income workers or small traders) would rather keep the cash in hand than deposit it in the current scenario.

Second, at a time when bank branches are struggling and ATMs are gasping for cash despite the restricted withdrawals since 8 November, how can the RBI expect banks to offer unlimited withdrawal (which is what the line beyond the current limits; preferably, available higher denominations bank notes of Rs 2,000 and Rs 500) suggests. An email sent to the RBI spokesperson seeking clarity on the press release remained unanswered at the time of writing.

So far, given the withdrawal restrictions, only a fourth of the money deposited in bank branches have gone out of banks as withdrawals. Since 10 November up to 27 November, 2016 banks have received deposits of Rs 8,11,033 crore, while exchanges amounted to Rs 33,948 crore, taking the total figure to around Rs 8.4 lakh crore. As against this, the amount withdrawn by the public is Rs 2,16,617 crore from their accounts either over the counter or through ATMs.

RBI-finmin disconnect

PM Modi and economic affairs secretary Shaktikanta Das have been dominating the demonetisation episode from the beginning, not RBI governor Urjit Patel. Theoretically, the central bank is the authority on currency management and hence the governor should have played an active role by taking the public into confidence and push ahead the demonetization exercise. This is despite the fact that demonetization was primarily a political decision, not an RBI job.

But, it would have been far better if the execution of the plan was effectively communicated to the public by the central bank governor, rather than a government bureaucrat. But, Patel has been behind the scenes from the beginning.

Also, there has been a serious disconnect between the RBI and the government on the implementation of demonetisation. Frequent changes in rules and broken promises have become the norm since the 8 November announcement that points to absence of coordination.

In a 11 November press release, the RBI had said, “The facility for exchanging the withdrawn denominations of Rs 500 and Rs 1,000 is available for nearly 50 days. The Reserve Bank appeals to members of public to be patient and urges them to exchange their old notes at their convenience, any time before December 30, 2016."

This promise of the central bank to the public to give time till 30 December was broken when the Finance Ministry said on 24 November that beginning midnight, the exchange of old Rs 500, Rs 1,000 currency notes at bank counters would be stopped.

The Opposition parties have criticized Urjit Patel for compromising the central bank’s autonomy for his silence on the cash-crisis for over two weeks. Since then Patel has spoken to a few media houses but except for his assurances that the cash situation is under control (which is not reflected on the ground though), the central bank governor hasn’t addressed the media to offer more clarity to the public on the actual liquidity position of the banking system and how soon will the currency-crunch last.

The ball is in Patel’s court now. The governor would do well coming out of the shadows of the finance ministry and be his own man to address the public. Else, the demonetization episode will also be remembered as an event when RBI, an institution of impeccable record, compromised its functional autonomy.

Updated Date: Nov 29, 2016 15:34:54 IST

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