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Friday, November 18, 2016

Questions of law in demonetisation

by Pratik Datta, Radhika Pandey, Suyash Rai, Shubho Roy, Ajay Shah.

In the demonetisation problem, there is an economics dimension [example], and there is a public administration dimension [example]. These two dimensions have, thus far, dominated the discourse. In addition, we feel there are three important questions of law which deserve attention:

  1. Restrictions were imposed on withdrawing money in bank accounts. What is the legal validity of such restrictions?
  2. The notes cease to be legal tender, i.e. valid for exchange between counterparties to a transaction. However, what happens to the signed promise of the Governor of the RBI to honour the notes? Answer by Pratik Datta and Rajeswari Sengupta, 1 December 2016.
  3. What happens to the assets (on the RBI balance sheet) which back the notes that are not exchanged? Answer by Radhika Pandey and Bhargavi Zaveri, 18 November 2016.

The authors are researchers at the National Institute for Public Finance and Policy.


  1. 1978 demonetization was done via an act of parliament. Why was it not done that way this time?

  2. To answer question 2: No harm done, it is allowed

    From the RBI Act:
    (1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in 4[India] in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government].

    (2) On recommendation of the Central Board the 1[Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification].

    For question 3: My take is that the revaluation account (CGRA) on the asset side should be adjusted to match the reduction in liabilities.

    For question 1: I am hoping someone else will answer.

    1. For Question 1) The limit on withdrawal is not unusual. Debit cards have anyway withdrawal limits.

      For question 2): Practically, the note does not cease to be a legal tender. It is the paper which is declared as invalid certificate for the legal tender. Once, the paper is deposited, the legal tender will pass to the plastic money


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