Undeclared, untaxed and potentially criminal money in the economy was believed to largely exist in big bills, and so the scheme was designed to draw that cash out of the shadows. The thought process was that many bills would not be exchanged, as criminals refused to declare their funds, and so those enterprises would lose out. Instead, the plan appears to have only briefly inconvenienced holders of that so-called black money.
India's Finance Minister Arun Jaitley reportedly told a conference in New Delhi that illegal money had indeed found its way into the banking system, but said authorities are investigating 1.8 million bank accounts and 200 individuals to identify and tax that black money.
Opponents of Prime Minister Narendra Modi were quick to jump on the RBI's findings as proof that demonetization had failed. For one, former Finance Minister Palaniappan Chidambaram asked on Twitter if the whole effort had been a laundering scheme.
"Critics have presented this as overwhelming evidence that demonetisation failed in its stated aim of clamping down on illicit wealth, known colloquially as 'black money,'" Shilan Shah, India economist at Capital Economics, wrote in a Wednesday note.
"After all, the rationale was that demonetisation would penalise those storing illicit cash as they would be unable to declare it," he added.
A report by the Financial Times said complex money-laundering networks sprang up in Asia's third-largest economy after the demonetization scheme was announced. Wealthy individuals, attempting to evade tax authorities, sold the banned notes at a discount to brokers who dispatched low-income Indians to deposit or exchange them at banks.
Others turned to friends and relatives to help channel their undeclared cash into the banking system.