Normalcy has returned to the currency system post demonetization and the pace of cash withdrawls has come down, said R. Gandhi who retired as deputy governor of Reserve Bank of India (RBI) on Monday and was in charge of the currency management division. Calling the note ban a well-thought-out and well-deliberated decision, he said the only thing he would do differently with the wisdom of hindsight was print more Rs500 notes. Edited excerpts from an interview:

What gave you the confidence to go ahead with demonetization?

That decision was not taken on a single day. Initially, it was only a thought. A lot of discussions happened: Is it good or bad? If we have to do it, what (are the) ramifications? So it was not as if somebody decided and went about doing it overnight. Secondly, even if it were to be done, we were very clear that the final call will have to be taken by the government because it is a policy decision and not in RBI’s purview. If such a policy decision is taken, then how do we implement it? (What are the) backward linkages, forward linkages? All such debating, thinking and preparation gave us the confidence to go ahead.

Which decision came first? The decision to introduce Rs2,000 notes or the withdrawal of Rs500 and Rs1,000 notes?

These two decisions were in parallel. The normal practice in currency management is to periodically have a plan. In 2014, we had come to a conclusion that we need higher denomination notes. So, on that basis, we had recommended Rs5,000 and Rs10,000 notes given the pace of inflation which we had and which we had projected. Currency is an area where nothing can be done overnight. Everything has a lot of backward linkages and requires lead time. Any decision that you take, to implement it, it will be about 8 months to a year. Then the government had its own public policy ideas about demonetization as a control on black money. So discussions were happening in parallel.

With the benefit of hindsight, would you say that you did not anticipate the complexities? There were 50 notifications in the first 30 days. Would you have done anything differently?

I don’t think we didn’t plan well. We planned everything. Every reaction was fully foreseen. There was no nasty surprise for us. Everything had been well identified, and debated. Several instructions were given by us. But you need to analyse it differently. About 20 (notifications) were relaxing rules. These relaxations were also pre-planned. If at all, there were one or two without planning. The rest were planned. The remaining 30 were regulatory instructions to banks. That we could not have given upfront, it would have let the cat out of the bag. In hindsight, if there’s anything I would have done differently… may be the quantum of Rs500 notes production. We may have decided differently. That’s the only correction.

When did the consultations on the note ban begin?

The consultations started in January. The introduction of Rs2,000 was a decision irrespective of demonetization.

Did the printing presses have enough capacity to support the withdrawal of 86% of currency in circulation?

That was a big discussion. That is why the agreement on the Rs2,000 note (majority of notes printed initially were of this denomination). Because we wanted to have that much value in exchange (for old notes).

Did nobody in the RBI central board express any concern or dissent about this decision?

Discussions were already on. In any policy decision there will be questions. Finally it was presented to the board. I wouldn’t say that there were no concerns or questions. But we could address them. The way we had prepared and the way we had planned, it was possible to be implemented. Yes, the inconvenience to the public was admitted. One-is-to-one (like-for-like) cash was definitely not going to be available.

The board was apprised only one day prior to the move?

Yes. We could not inform the board much in advance.

Is there any target for remonetization?

Currency in circulation can never be targeted. It is in the hands of the public. We manage it by creating enough stock. If public wants more, the draw will be much faster. If they want less, draw will be much lesser. Over a period it is not a constraint to supply whatever money the public demands. In a short period, there will be leads and lags. Now with 70%, we are seeing complete normalcy across the country. There is no trouble anywhere.

So, when will normalcy be restored or when will we go back to pre-demonetization levels?

We have already reached that stage. As of now, 73-74% actual cash has come. The pace of remonetization has come down because there is no demand. The pace at which money is demanded by the public is seen by the speed at which they are withdrawing from the banking system. When the pace is slowing down, then we have met their demand. From January onwards, cash withdrawals are coming down and we are also looking at how much currency is coming back. For most of the small banks and private banks, deposits are more than withdrawals. They are in surplus. They don’t need to draw more money from RBI. They are able to recycle.

Why is it taking so long to tell the public about the quantum of currency that has come back?

It’s the last and final word. The final count. RBI would like to have it really, fully done. Checking for counterfeit notes will take a lot of time. To verify 24 billion SBNs (specified bank notes) collected will take months.

Demonetization has led to a debate on RBI’s autonomy. Comments?

RBI does not have the power to demonetize. The power is with the government only. That’s a government call. I don’t see it as a conflict on autonomy. It is an area where only they are authorized to take a decision. It’s a joint effort. Everyday there were consultations.

You have worked for 37 years. Over the years have you seen RBI’s autonomy eroding?

Different types of activities have been assigned to RBI or removed from RBI. That is the evolution of RBI. I will not read too much into that. Regulating banking is different from regulating any other financial activity. Any other financial activity or real sector activity is based on risk capital. Banking is different. People’s money is entrusted with an institution. That’s not risk capital for the bank. The way banks have to be regulated is different, it cannot be equated (with other regulators). They are trying to equate it. That is a dangerous trend in my opinion.

FSLRC (Financial Sector Legislative Reforms Commission) has openly recommended that we should encourage regulated entities to question the decisions of the regulator and they should not hesitate to drag them to court. I understand why they are saying that. A regulator cannot unilaterally decide something and impose it on regulated entities. But the way they are putting it may not be right.

You have worked with different governors, who was it easiest to get along with?

Dr C. Rangarajan. In terms of long impact, I’d say S. Venkitramanan. He made us think 10 years forward in every area.

The decision to introduce Rs200 notes... Is it a precedent to slowly demonetize Rs2,000 notes?

Introducing a currency denomination is a stand-alone exercise. It has nothing to do with demonetization. In the normal course in any country’s stable of denominations, we have the 1 series, 5 series and 2 series like 10s, 20s and 50s. We have Rs100 and Rs500. Rs200 is the missing one.

Is there a need for Rs2,000 notes? Will they be phased out?

The need for Rs2,000 will always be there. The highest denomination requirement is based on inflation. In any continuous inflation economy, you will have to introduce higher denominations. Or you will not be able to manage. In a stable inflation economy, there is no need. In the US, for instance, the $100 bill is more than 100 years old. For us, we introduced Rs100, then Rs500 and then Rs1,000. Our economy was facing inflation. Now with the monetary policy committee and inflation control, we can definitely hope to have stable inflation. Then we may not require any more new denominations.

What happens to the liquidity worth ₹ 3.5 trillion in the banking system?

This is temporary. We knew the impact of demonetization was transient. Excess liquidity is coming down. In another few weeks, it will not be there. With remonetization, the liquidity has gone into the hands of the public. It is not going to be there for long. To the extent, people don’t want 1:1 cash, there will be excess. Right now about 75% of currency is remonetized. Remaining 25% is the excess you are seeing in the hands of banks. Is it a permanent addition to liquidity? It’s not. During this year, normal growth in currency has not taken place. We have not filled in whatever we have withdrawn. Excess liquidity will meet that need.

So, it’s not going to be inflationary?

No. It will not be. Credit growth has also not picked up. Day to day excess liquidity we are absorbing through LAF (liquidity adjustment facility).

Has the excess liquidity in the system made it difficult for RBI to intervene to stem the rupee’s appreciation since January?

The currency appreciation is a bit of a surprise. Post Trump (US president Donald Trump) we would have expected the dollar to strengthen. The decision to intervene is based on volatility. If the market is able to bear the changes, then we do not want to intervene. We are not against the direction of the rupee, whether it is appreciating or depreciating.

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