Technology is a double-edged weapon, it is available not only to bankers but also to counterfeiters

R. Gandhi, who recently retired as Deputy Governor of the Reserve Bank of India (RBI), oversaw the currency management department in the central bank which played a critical role during the demonetisation exercise. The veteran central banker shared insights on how the central bank handled the issue and the way forward to tackle counterfeit notes. Edited excerpts:

After spending 37 years in Reserve Bank of India, what will you consider as the two most difficult phases?

Of course, 1991 was first major troublesome period we had after the Harshad Mehta scam broke out. RBI got into a quite a bit of criticism though we believe people have misunderstood our role. Thereafter we had to shift our focus, our internal processes, and we brought a lot of changes. It also was the same period when economic reforms started. This was one of the turning points when I look back.

The other one is, of course, is the recent demonetization exercise, which also had quite an impact. So, these two events stand out.

During demonetisation RBI had to face criticism...

No central bank in the world can ever avoid criticism. The reason is that the central bank also looks beyond the normal horizon. Keeping that long-term perspective, we have to take certain decisions, which are not well appreciated or well understood in the short run. We will not be perturbed by such criticism.

What are the lessons from demonetisation for a regulator?

One lesson we learned is that people will be able to sustain a certain amount of pain provided it is for a larger purpose. So, if your objective is right, you need not hesitate to take such decisions. Normally, while taking such a decision [of note withdrawal], we tend to hesitate because it will create large scale inconvenience to the public.

Earlier, we used to withdraw notes quietly. The public would not have known that we are withdrawing old series notes. In 2014, we took a call let us make a conscious announcement to withdraw pre-2005 series notes. That time we also debated a lot whether we should announce it as we thought this may create panic or people losing confidence in currency. So we were very hesitant.

But post-demonetisation, we have learned that if the purpose is right, people will agree to suffer for a brief period.

What is the strategy to curb counterfeiting of notes?

Technology is available not only to central bankers but also the counterfeiters. Technology is a double-edged weapon. So, we need to issue new series of notes much, much faster. Every five to seven years we should necessarily bring in new series of notes to be ahead of the counterfeiters. And in the process, we should be able to withdraw the old series notes.

Currency management is also a logistical issue. How can this be made more efficient?

Current management is nothing but supply chain management – with good planning, we can deliver the things. Earlier, the supply chain management used to be from presses to RBI, then to currency chest and then to banks. That was the sequence. This process used to take several weeks.

During the demonetisation process, we could deliver the notes in terms of days and not weeks. We followed a different model this time – the hub and spoke model. We directly send notes from the presses to the chests in identified locations. We had chosen chests in key locations, which we call hub, from where it was distributed to other chests and bank branches. That way large scale movement of currency was ensured in the shortest possible time.

One of the ideas that we are propounding is that of mega currency chests, which will act as hubs. Roughly in each district, one big currency chests should be there. That chest should be able to cater to all the other chests in the district in the shortest possible time. A pilot was commissioned during the demonetisation period.

Did demonetisation exercise come as a surprise to you?

The whole discussion started long back, sometime in 2016 only. So, that did not come as a surprise.

Okay. But, was the date a surprise…

Of course, date was finalised by the government. We never knew what will be the date. As a concept, it was debated, preparations had been going on.

Was the discussion started during Raghuram Rajan’s time?

Yes, it started during his time.

Do we need ₹200 notes in the system?

Any country will have various type of notes. Standards are 1 series, 2 series and 5 series. Earlier, we saw ₹1, ₹2 and ₹5 notes. Now, we have ₹10, ₹20 and ₹50. We also have ₹100 and ₹500, but ₹200 note is the missing one. It is a natural phenomenon that the gap will be filled. For conducting day to day transactions, the idea is that one should be able to complete a transaction with the least number of currency notes. So, the 2 series plays an important role.

Is there a plan to bring back ₹1,000 denomination notes?

The government has said that they don’t intend to bring it immediately.

The ₹2,000 note and the new ₹500 are smaller in size ... What is the reason behind the decision?

These new series notes are of an international standard, that is why we have changed it. With a smaller size, we could print more pieces of currency note out of one sheet. Production has increased roughly by 20%.

So, will the size for the existing notes, like ₹100 and ₹50, change?

Yes, for all the other denomination, the new series will come in due course. This new series note are easy to handle, easy to keep in wallets.

What was the reason for stopping the dissemination of data like deposits during the demonetisation period?

Central banks always access whether the information will be understood in the right way and make the right impact.

If we assess that the circumstances were not conducive for correct understanding then we do not share. During the demonetisation exercise, we came to that conclusion. We thought sharing the information could lead to more confusion.

What are the glitches involved in the transition to a digital world?

As I said, technology is a double-edged weapon. If it is in the wrong hands, it can be misused. So, it is necessary to build as many defences as possible and make it more secure and safe — that is the primary duty of the regulator.

Since cybersecurity is going to become a big challenge going forward, RBI has decided to create a new institution for research work in cybersecurity. Their major remit is to conduct research and development work in cybersecurity. It will also undertake high-end cybersecurity assessment of the banks. It will be fully functional in the next few months.

How safe are mobile wallets?

There are various types of payment systems available targeting different levels of simplicity, complexity and usage. The features of a low-end system will be very simple but obviously security level will be less. Obviously, a high-end system has complex safety and security-related arrangement and they will be able to provide sophisticated service. Both are needed.

For the low-end systems, sophisticated structures are not needed because that will mean building too many secured features which will make it high-cost which is not warranted for a small value transaction. That is why, the mobile wallet, is at the lower end.

So, can payments systems be interoperable?

A mobile wallet is a different product from a bank’s net banking product. Ideally, there should be interoperability between payments systems. But we have to be careful before saying a full yes to it. The reason is cost.

You cannot cherry pick the positive features of one system and ask others to take it. It comes along with the package.