Demonetisation is a concept and an executive act where a government strips a currency unit of its status as legal tender. In India, the legal framework for this action is primarily rooted in Section 26(2) of the Reserve Bank of India Act, 1934. This section empowers the Central Government to declare that any series of banknotes of any denomination shall cease to be legal tender, provided it is done on the recommendation of the RBI Central Board.
India has historically used demonetisation to combat issues like black money and counterfeit currency, with major instances occurring in 1946 and 1978. The most recent and significant event was announced on November 8, 2016, by Prime Minister Narendra Modi. This act withdrew the legal tender status of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series, which accounted for approximately 86% of the currency in circulation. The stated objectives were to curtail the shadow economy, reduce the use of illicit cash, and promote digital payments.
The mechanism required citizens to deposit or exchange the specified bank notes at banks within a stipulated period, which ended on December 30, 2016. Following the withdrawal, the Specified Bank Notes (Cessation of Liabilities) Act, 2017, was enacted to formally end the liability of the Reserve Bank of India and the Central Government to honor the value of the demonetised notes.
The legality of the 2016 demonetisation was recently challenged and upheld by the Supreme Court in January 2023. The Constitution Bench, in a 4:1 majority judgment, ruled that the decision-making process was not flawed and had a rational nexus with the legitimate state interests of curbing fake currency and black money. The dissenting opinion by Justice B.V. Nagarathna argued that the action should have been implemented through an Act of Parliament, not a notification under Section 26(2) of the RBI Act.