April 18, 2024

Lukmaan IAS

A Blog for IAS Examination



THE CONTEXT:  The supreme Court recently in its decision upheld by 4:1 majority the decision taken by the Union Government six years ago to demonetize the currency notes of Rs. 500 and Rs.1000 denominations.A five-judge Constitution bench headed by Justice S A Nazeer, who will retire on January 4,  pronounced its verdict on the matter.



  • It refers to the withdrawal of currencies by the central bank from the economy so that it will not be used further as the legal tender.
  • These decisions are taken around the world to curb the black money and counterfeit currency.


  • On 8 November 2016, Prime Minister announced the “demonetization” of `500 and `1,000 notes with effect from the next day. It was sought that the demonetization will help the country in many ways
  • Rational of demonetization-

Ø It was claimed that the demonetization will help curb terror financing.

Ø It would lead to unearthing the black money.

Ø The fiscal space of the government will increase.

Ø It would lead to reduce the the interest rate of the banking system.

Ø It would create the less cash economy- as it would formalize the Indian economy and digital transactions will be promoted.


  • A total of 58 petition was filed challenging the central government’s 2016 notification to ban Rs 500 and Rs 1,000 currency notes.
  • Supreme Court was hearing these petitions as they were referred to a Constitution bench of the Supreme Court in December 2016.
  • Supreme Court decision-Supreme Court bench’s majority verdict differed from the minority judgment on their interpretation of a provision of the Reserve Bank of India Act, 1934.
  • The main point of difference between the majority and minority judgments was the interpretation of Section 26(2) of the RBI Act, 1934, which allows the central government to declare that “any series of bank notes of any denomination shall cease to be legal tender” after a recommendation from the central board of RBI.

Section 26(2) in The Reserve Bank of India Act, 1934

(2) On recommendation of the Central Board the 2[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 3[save at such office or agency of the Bank and to such extent as may be specified in the notification].



  • Supreme Court by 4:1 majority, holds that the decision-making process behind the demonetization of Rs.500 and Rs.1000 currency notes in 2016 was lawful.


  • Supreme Court held that – the word “any” in Section 26(2) must be interpreted as “all”, otherwise it would lead to an anomaly – e.g. if there are 20 series of a particular denomination, the Centre cannot demonetize 19 series and leave behind one series to continue as legal tender – an interpretation which nullifies the purpose for which power is bestowed would be contrary to the principle of purposive interpretation.


  • Supreme Court held that the decision making process is not flawed in law – the duty of the Court is to confine itself to the question of legality – it ought to determine whether a decision-making authority exceeded its powers, committed an error of law, committed a breach of the rules of natural justice. It is not concerned with the manner in which the decision was taken.
  • The Court held that it does not have the expertise to go into the question whether the object with which demonetization was effected is served or not – mere errors of government are nor subject to judicial review, only palpably arbitrary ones are declared void. Thus it provided for balance between judiciary review and executive actions.
  • Supreme Court applied the test of proportionality —reasonable nexus between the measure of demonetization with the purpose of addressing issues of fake currency bank notes, black money, drug trafficking and terror financing – Court does not possess the expertise to decide what alternative measure could have been undertaken – there is a proper relation between importance of curbing the menace of fake currency, black money etc.if there was reasonable restriction, it was in the larger public interest.


  • When Central Board recommends demonetization, it is only a particular series of banknotes of a particular denomination as recommended under Section 26(2) – the word ‘any’ cannot be read as ‘all’ – if ‘any’ is to be read as ‘all’, it would provide unguided discretion to the Central Board.
  • Supreme Court held that only the Central Board of RBI is the initiator of the process of demonetization – the provision has a restricted operation, either the Central Government accepts the recommendation of the Central Board and issues a gazette notification or refuses to accept the recommendation.
  • Supreme Court judge held that Central Government has the power to demonetize ‘all’ series of banknotes of ‘all’ denominations, even without the recommendation of the Central Board, but not in exercise of Section 26(2) – such an extensive power is to be exercised only through a legislative process [legislation/Ordinance (if urgent)] and not by way of an executive act – the Parliament should be involved in the process of implementation of such a scheme of demonetization.
  • It held that government must seek the opinion of the Central Board of RBI as RBI is the sole authority to regulate circulation of bank notes. The opinion of the Central Board ought to be an independent and frank opinion – the Central Government can move ahead with demonetization irrespective of positive or negative opinion of the Central Board, but by enacting legislation or by way of an Ordinance and not an executive notification.


  • Reserve Bank of India Act, 1934 – Section 26(2) – The decision taken by the Central Government to demonetize is to be based on the recommendation of the Central Board of RBI.supreme court in its judgement said — the recommendation ought to be construed in the context in which it is used – in the present context “recommendation” would mean a consultative process between the Central Board and the Central Government.
  • Instead of focusing on individual stakeholder, the Supreme court said it is to be considered by the Court whether each of the parties had disclosed all relevant facts and factors to each other for due consideration.
  • Monetary Policy Committee is the manifestation of the innovative consultative process, where Government and RBI takes consultative decisions. It affects the independence and autonomy of the RBI. However, the influence of the government has increased as earlier RBI was taking the sole decision but now government say has increased.

Advantage of the consultative process

  • Better sharing of ideas through a consultative process
  • The good and innovative decision is taken
  • Better coordination between fiscal and monetary policy.


  • Demonetisation was the process which was done through executive action without going through the legislative process. Thus it accounts for executive activism. In this way executive accountability in the Parliament is not ensured. Thus, the accountability of the executive to the legislature is bypassed through it. For Example, the Aadhar act was passed as a Money Bill.
  • Statutory interpretation is the process by which Court interpret the law. Supreme Court has been given authority under article 13 for judicial review. It can declare any law null and void if it is against fundamental rights. In Indian Constitution the doctrine of process established by law has been followed In which the law is valid only if the procedure is followed. However, after Maneka Gandhi case Supreme Court adopted due process of law . Under this doctrine, the rights of the citizen are protected based on the fairness of the law.
  • However, at various occasions, the Supreme Court has not been able to make the executable accountable. In the recent judgment on demonetization, majority opinion has given the interpretation of the law based on the written words. The substance of the welfare of the people has been neglected in the judgement. Demonetisation has affected a large number of people.


“RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source.” —Justice Navarathna.

  • Regulatory bodies are independent agencies that are assigned to address the market failures, and anti-competitive pricing and promote public welfare. It stems from the Article 53(3) which authorizes the Parliament to confer by law regulatory function to authorities.However there are issues with autonomy and independence of these regulatory bodies.
  • Financial independence— First criteria for independence is financial independence. Their institutional structure should be such that they an function independently and autonomous. However, financial independence is compromised as they depend upon line ministry for the budget. There is no fixed tenure, so the government has been meddling by changing the tenure. Functional independence is maintained when it maintain arms length with the interest group.
  • Further there is overlapping jurisdiction, for Example, SEBI aane IRDAI and between RBI and Competition Commission of India (CCI) over merging of banks. Professional accountability should be toward the Parliament, however they are not answerable to the parliamentary directly . They don’t submit annual report to the Parliament. However there must be parliamentary accountability as it is an ideal form of political accountability. However, in contrast to this, the government interferes with these regulatory bodies.
  • Various other institutions also face the issue of independence. For Example since the inception of TRAI, its independence has often been challenged. For a regulator to be independent in the true sense, it needs to have functional and financial independence from the government. In the case of TRAI, functional independence has been weakening over time. Political barriers to such independence are quite evident from a study of the sector‟s regulatory history, as a rollercoaster ride has characterized relations between the government and the TRAI.
  • RBI is the central bank and regulatory body responsible for the regulation of the banking system. It regulates the inflation and money supply in the economy . It also issues the currency and act as a last resort to the banks. Under the inflation-targeting regime agreed upon between the RBI and Finance Ministry , RBI is required to maintain the inflation in the tolerance band as decided by Monetary Policy Committee (MPC).
  • However at time institutional architecture affect the independence of the banks. For example, RBI has to transfer the surplus amount to the government, which may affect the RBI’s ability to manage the economy’s monetary policy.
  • In a recent judgement of the supreme Court, Justice Nagarathna’s Dissenting Opinion held that the RBI act does not envisage initiation of demonetization of bank notes by the Central Government. Sub­section (2) of Section 26 of the Act, contemplates the demonetization of bank notes at the instance  of  the Central Board of the Reserve Bank of India. Thus if demonetization is to be initiated by the Central Government, such power is derived from Entry 36 of List I of the Seventh Schedule to the Constitution which speaks of currency, coinage and legal tender; foreign exchange. Thus if the government initiates the demonetization of the currency, without going through the legislative route,it interferes with the RBI’s domain.
  • Further,Under section 7 of the RBI, the Central Government may, from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public inter­est. Clearly, this section empowers the government to issue direction in terms of public interest to the central bank, which otherwise does not take orders from the government.

THE CONCLUSION: Parliamentary accountability is the bedrock of constitutionalism and Parliamentary democracy. Though demonetization of currency notes 500 and 1,000 was based on the legality under the RBI Act. The dissenting judgement highlighted the concern of the people. The demonetization was to curb the black money and terror financing, more concerted efforts can be made by proper planning and execution. Further, the Parliament should be taken into confidence as it could have provided crucial input and make the executive accountable. In this way, the demonetization drive could have become the national drive against black money and terror financing.


  1. Analyze the Judicial review power of the Supreme Court in the context of demonetization.
  2. “Despite RBI being an independent body, there has been a concern due to interference by the Government.”Critically examine.
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