Because The Reserve Bank of India Act, 1934 gives such power to the Indian government.
The sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 mentions:
(2) On recommendation of the Central Board the 3 [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 4 [save at such office or agency of the Bank and to such extent as may be specified in the notification].
This was precisely cited in the gazette notification no. 2652 issued by the Government of India in which they announced the demonetisation:
S.O. 3407(E).─ Whereas, the Central Board of Directors of the Reserve Bank of India (hereinafter referred to as the Board) has recommended that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) shall be ceased to be legal tender;
Now, therefore, in exercise of the powers conferred by sub-section (2)
of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934)
(hereinafter referred to as the said Act), the Central Government
hereby declares that the specified bank notes shall cease to be legal
tender with effect from the 9th November, 2016 to the extent specified below, namely:
But to legally terminate RBI’s liability on the banned currencies to prevent future litigation an ordinance has to be passed within certain period of months. As this1 article explains:
..although a demonetisation can be done through a notification, a
Presidential Ordinance or Parliamentary Act is necessary to:
- Prohibit transfer or receipt of the banknotes that have ceased to be legal tender, so that these do not reflect anymore as a liability
on the Issue Department of the Reserve Bank of India.
- Restrict the RBI’s legal obligation to exchange the old notes with new notes.
(1) and (2) cannot be done through a notification. They need a
residential Ordinance or Parliamentary Act. Otherwise, although the
demonetisation would be legal, the RBI would continue to remain under
a legal obligation to keep on exchanging the old notes with new ones.
Accordingly the Government of India had drafted an ordinance2 whis was approved by the President of India on 30th Dec 2016.
1 This is an excellent read about demonetisation, its history and legality. Covers lot of interesting stuff.
2 Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016