The matter to demonetise currency was under discussion and consultation with RBI for several months preceding 8th November, 2016.  The Government in a letter dated 7th November, 2016 requested RBI to consider cancellation of legal tender character of ₹ 500 and ₹ 1000 denomination with the objective to eliminate black money and to curb the infusion and circulation of Fake Indian Currency Notes (FICN).  The Central Board of the Reserve Bank in its meeting held on November 8, 2016 deliberated in detail a proposal for withdrawal of legal tender status of banknotes in the denomination of ₹ 500 and ₹ 1000 of existing and any older series in circulation and after due examination recommended withdrawal of legal tender status of such notes.  The legal tender character of banknotes of the Specified Bank Notes in the denominations of ₹ 500 and ₹ 1000 in circulation as on the 8th November, 2016 was cancelled by the Central Government, on the recommendation of the Central Board of RBI, with effect from the expiry of the 8th November, 2016 in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934), with the objective to eliminate black money and to curb the infusion and circulation of Fake Indian Currency Notes (FICN).

A recent study by the Indian Statistical Institute in 2016, commissioned by Ministry of Home Affairs (MHA), has estimated a steady infusion of FICN into the economy.  Reports have stated that the objective of infusing FICN into India is a combination of various factors that include destabilising the Indian economy, funding terrorists with the proceeds of FICN trade and using existing FICN network for subversive activities such as espionage, smuggling of arms and other contrabands into India.  These activities pose threat to the territorial integrity and financial stability of the country.  The Special Investigation Team (SIT)’s fifth report, mentions that large amount of unaccounted wealth is stored and used in the form of cash and also there have been huge cash recoveries by law-enforcement agencies, from time to time.

The White Paper on Black Money by the Department of Revenue in 2012 mentions that cash has always been a facilitator of black money since transactions made in cash do not leave any audit trail.  It also quotes the estimates made by the World bank in July, 2010 wherein the size of the shadow economy for India has been estimated at 20.7% of the GDP in 1999 and rising to 23.2% in 2007.

A parallel shadow economy corrodes and eats into the vitals of the country’s economy.  It generates inflation which adversely affects the poor and the middle classes more than others.  It deprives Government of its legitimate revenue which could have been otherwise used for welfare and development activities.  Black Money funds terror, terrorist and terrorist operations from within and across border of the country.

Specified Bank Notes (SBNs) of ₹ 500 and ₹ 1000 returned to currency chests of Reserve Bank of India (RBI) as on December 10, 2016 amounted to ₹ 12.44 lakh crores.  Reports have been submitted by bank to Reserve Bank of India (RBI) regarding the amount deposited in the banks as on December 30, 2016.

This was stated by Shri Arjun Ram Meghwal, Minister of State in the Ministry of Finance in written reply to a question in Rajya Sabha today.

Demonetisation of high denomination notes alters legal tender status to curb black money and counterfeit currency circulation. Cancellation of the legal tender status of specified high denomination banknotes was effected to disrupt cash based concealment of unaccounted wealth and to stem circulation of counterfeit currency; the Central Government, on the Reserve Bank's recommendation, exercised powers under sub section (2) of section 26 of the Reserve Bank of India Act, 1934 to withdraw the legal tender character of the Specified Bank Notes, and returned notes were routed to RBI currency chests with banks reporting deposits.