Gokarn hails demonetisation, says needs to be done frequently

Hailing the government's decision to demonetise Rs 500 and Rs 1,000 denominations, IMF Executive Director and former RBI deputy governor Subir Gokarn said such moves at regular intervals will be the best protection against counterfeit notes.

"What the government did on Tuesday is essentially to bring the best practice of demonetisation into play. If you are doing this every five-six years, you are introducing new series with more advanced safety features and when you do that, you are immediately demonetising all the old series," Gokarn told a BSE summit here this evening.

"So, this is your best protection against counterfeiting and hoarding." In the biggest crackdown against black money and fake notes, Prime Minister Narendra Modi on Tuesday announced withdrawal of higher denomination notes from circulation.

Gokarn said if the notes are replaced every 5-6 years, people will have less incentive to hoard notes.

When new notes with enhanced security features are introduced, it is essential to withdraw older notes to curb circulation of fake notes, he added.

"When you introduce notes with enhanced security features and if you are not taking the older ones out of circulation, you are not addressing either the counterfeiting problem or the hoarding problem," Gokarn explained.

He termed short-term liquidity concerns as valid since the demonetisation was done after a long time and for a large number of notes.

His sense is that ultimately the long-term benefits from this will clearly outweigh the logistics or the short-term liquidity pressures.

Asked about how long liquidity will remain a concern, Gokarn said it would depend on how quickly the new notes are circulated.