Currency Demonetisation and Future course of Indian Economy

[Suraj]

Regarding value remaining same - no it won't. Only the prices of real estate will fall on relation to a lot of other commodities. So say a middle class who had invested in gold vs middle class invested in house, when price of house falls in rupee while the gold doesn't(and actually increases), there is a net loss in value for the guy holding the house. So no, your point is wrong .

There's no difference between gold and property as far as black money is concerned. Both , and every other thing will fall in value because there are fewer notes in circulation chasing them.

That aside, it still doesn't change what I said about INR becoming practically untrustworthy. This is a step back in 4 decades wrt monetary policy. No body, who is following this in their right mind will trust INR now considering how surprisingly this was implemented. We need Inr to be at the level of trustworthiness of the USD ,not make it equivalent to Zimbabwean $ subject to whims and sizes of politicians

On the contrary, the INR will rise in value because there are fewer notes in circulation. The black economy is millions of banknotes circulating (some of them fake) outside of the control of the central bank. Once the cash is deposited, GoI has nothing to gain by recirculating it - the cash will be destroyed, and large value deals will be conducted using electronic means. Fewer rupees chasing the same goods and assets = currency strengthens relative to the goods, which fall in price.

Interesting that you mention Zimbabwe, the poster child of hyperinflation and unrestrained printing of progressively higher denominations. Exactly the example to use when discussing the opposite - a *deflationary* act. Makes no sense at all. Interestingly, the US did exactly the same thing Modi just did, during the reconstruction era, by curtailing higher value denominations. At one time, they had $500-$10000 banknotes in circulation too. So this means we should turn into an economic basketcase like the US became.

[narmad]

Question to Finance gurus

What will be the affect on exchange rate ?

[MohdKav]

The impact on property valuations and it's derivative market like lap products needs to be assessed in due course of time.

A 50% reduction in valuations is wild speculation and must be avoided..

Wait and watch how the situation evolves makes sense..

Distress value of assets by Bank valuer's was always taken as half the real going price in the area. Now I believe it will be even less than that .

[Manish_Sharma]

You honestly think a businessman paying 30% of his taxes to the inefficient government is better than him able to invest the money back in the economy albeit in black?

But only the govenment is not inefficient anymore. 9 lakh crore being invested in railways to improve service plus infrastructure. No new populist train started to mantri ji's state, but solidifying the foundations of railway.

A neighbour of mine drives a lot on highways in and out of delhi and he has seen Gadkari so many times. Working hard, on site inspection. 4 lakh crores worth of highways being constructed.

Just check how much Goel's energy ministry has made advances in leaps and bounds. When NaMo took over there was an electricity crises and kejri-sonia were cursing him. Goel did a press conference and told about electric cables ordered from germany. Has there been a single hue and cry on electricity since then?

This PC I am typing from is without a UPS for last 1 year. As there is hardly any blackout anymore.

General Shri V.K. Singh had to write to mms regarding having ammunition to fight only for 2 days, and pmo leaked the letter.

Now ammunition is filling up the stocks of army. Even this news of demonitisation of 500 and 1000 didn't leak out, this my friend is good governance !

[KJo]

Only once in Independent India in 1978 - by non-Congress government. Vaguely remember it, so 38 years ago.

while lots of money from illegal trade, corruption, etc is black. The majority of black money is in the hands of the "unorganized" sector, the largest sector in India made up of small businesses. So your paan walla to jewelers and most retail.

This move will not be without backlash from many interested groups. Hope Modi stays strong to resist these pressures. All the best to him.

I heard from my dad that in 1977-78, they did what I think was a devaluation, and we moved from US to India that time and dad said he lost quite some money on the conversion. Maybe that is what you mean.

[RohitAM]

Stating that this move will devalue the INR is illogical; as a matter of fact, it will strengthen the currency internationally because of a better track of the cash liquidity existing in the Indian market - the government has specifically mentioned that the 500 and the 2000 notes will not be printed en masse, and there will be an upper limit on their numbers, along with tracking them through whichever transactions they undergo. Additionally, the move drastically destroys the domestic black money and counterfeit currency markets in one go, immediately making the INR a much more stable currency, since the primary counterfeit denominations (almost 80% by value, apparently) in their current note design (primarily the 500 note, since we are getting a new one) have been effectively made illegal for transactions. This sort of thing was necessary for India, since countries like the US, China, and Germany don't have sh*tty neighbours who make counterfeit currency to destabilize the economy AND fund terrorist activities, since those fake notes cannot be effectively tracked - all of that changes now.

Imagine removing counterfeit and black money as even a minor percentage of the estimated 12 lakh crores worth of 500 and 1000 denominations currently available as cash liquidity in the market. Even the legalizing of 1 lakh crores worth of black money is massive for the economy - to put it in perspective, defense deal clearances worth 82,000 crores allow us to buy 83 LCA's, 464 T-90M's, and a ton of other military equipment. Now imagine channeling this sort of amount into infrastructure development in the economy - a lot of new and current infra projects can be covered with just 1/12th of that entire amount, and that's just scratching the tip of the proverbial iceberg.

[nirav]

A little OT, but this talk of it being a surgical strike on black money is so underwhelming and inaccurate..

It's MR as stated in our nuclear doctrine.
Massive, very massive!

[MohdKav]

Banks wont be giving out loans on Real Estate anytime soon, Loan against property will become redundant. It was already a tough market, now getting finance will be even more difficult

[MohdKav]

Deleted

[nirav]

How big is the lap market % wise to the business loan market ?

Also, problems faced by a few individuals are just that. Their problems.suck it up and get on with it.

The country can't be held hostage dye to concerns of a few.

And pls quit bringing in RTE. Is this your alt Dinesh ?

[MohdKav]

How big is the lap market % wise to the business loan market ?

Also, problems faced by a few individuals are just that. Their problems.suck it up and get on with it.

The country can't be held hostage dye to concerns of a few.

And pls quit bringing in RTE. Is this your alt Dinesh ?

why shouldnt people bring in RTE?
Sudden drop in asset valuation have huge financing impact on businesses especially small businesses

[SaraLax]

Why don't you see, that porkland-isi-cheenis had the paper ink and perfect copy of designs in these 500 & 1000 rupee notes. As NaMo said in his speech that a huge chunk of currency is copy funding the terrorists that is we are funding terrorists by continuing with compromised design and paper.

Loads of Dawood relatives in mumbai handling black money and terrorist cells from ghettos are holding all this using against 'us' the citizens of Bharat.

Suppose a trunkload of these 'currency notes' are being kept by a sleeper cell, who is to fund 12 other sleeper terror-agents of isi in case of war with porkistan to disrupt armed forces from inside the nation. ALL THEIR MONEY HAS BECOME MORE WORTHLESS THAN KABAADI RADDI NEWS-PAPER.

Printing presses running their ink - plates - design - paper production everything has become garbage, what isi will do with it they don't know.... they are banging their heads on the wall.

Before election sonia gandhi had IT raid on Kumarmangalam Birla's house and they found 25 crore rupees in cash.

Imagine before UP election how much cash will be there in Vadra-house as they know that IT raid on bianca vadra is impossible for govt. Now everything turns to mud. Same with other political parties for punjab elections, kejri must have made arrangements and suddenly AAP's money is kaput, so he cries ... naturally.

Jasooss Doval ji, must have made sure that this time china - porkistan won't be able to get design-ink-paper easily. Plus NaMo said in his speech, that RBI will make sure that currency of 500 & 2000 rupee notes will not be allowed to grow in big percentage, so in future there will not be such problems anymore.

Terror financing must have gotten a big boost when sonia gandhi made 1000 rupee notes from UK, and through Ahmed Patel's help isi must have gotten the secrets and designs of the paper.


And in one go

This is something targeted towards black money and not terrorists or fake currency. If it was, the change would have been brought in slow and it would have been as effective at solving fake currency(terror currency). In a country like india with a pathetic business environment, black economy is very important for both services and economic growth. You honestly think a businessman paying 30% of his taxes to the inefficient government is better than him able to invest the money back in the economy albeit in black? I hate coming back to rte but it is again one big example on how bad laws are worse than illegal activity/corruption. As per rte, hundreds of thousands of school will have to be closed down because it won't be able to meet the standards set in the stupid law and the only thing which keeps them going is the bribes. Would you rather have them closed down because that is illegal?

And of course, the fact that Bjp has made this political move as a tool against Congis is very disturbing and sets a very bad precedent. Unless someone is completely naive to think bjp is corruption free, this is something which can be repeated by Congis tomorrow under the same pretext. Which will mean even more uncertainty wrt INR.
http://swarajyamag.com/politics/nda-dem ... -stuns-all

No serious economist i know thinks it was a good move for economy.

Very strange, twisted statement that .... So how many 'serious' economists do you even know ?

I can quote many economists, hardened bankers and retired bankers too - who have welcomed this move in a very positive way.
Don't bring in some red-color-dyed-for-life 'economists' whose articles get featured in the stubbornly leftist portals like Frontline and Hindu newspaper - as 'economists' and these politically slanted economists have always been endlessly & unjustly berating the current PM.

This removal of unsafe 500/1000 INR notes serves two purposes at minimum - firstly, reducing the non-disclosed, non-taxed money that was inflating the real estate & similar assets and secondly rendering the terrorist/enemy outfits that are flooding our country with their production of 'almost true' 500/1000 notes & leading to unplanned devaluation of INR.

Now - Would these Terrorist Handlers/Sympathisers in India now be ready to come over to a bank/Post-office/RBI to hand over their chunk of 'almost true' 500/1000 INR notes and get the equivalent amount of new 500/2000 INR notes ?.

Agreed that those people who already have this undisclosed wealth in non-currency forms like say gold, diamonds or real estate held through benamis - are not getting hit in this so called 'black money surgical strike'. Yes - small businesses/jewellers/small construction companies/similar small entities are going to be caught in the net spread wide by this move and those entities will have to open themselves up for more intrusive inspections from CBDT & so on. But then - they were all given a chance by current NDA govt to disclose their undeclared money - until September 30 of this year and were assured that their identities would not be revealed to outside world. Tough luck for them if they didn't reveal their undeclared income but now get caught in the next step. If the people behind these entities & black money sources think - we should vote out BJP in the subsequent elections ... then so be it. That would be our nation's tragedy & we can go back to the laa-laa-land-governance of Congress's sleepy, incompetent Gandhi family & their useless set of so called crappy, totally-fake socialist parties and suffer the consequences of such a government.

[salaam]

How big is the lap market % wise to the business loan market ?

Also, problems faced by a few individuals are just that. Their problems.suck it up and get on with it.

The country can't be held hostage dye to concerns of a few.

And pls quit bringing in RTE. Is this your alt Dinesh ?

why shouldnt people bring in RTE?
Sudden drop in asset valuation have huge financing impact on businesses especially small businesses

[sarcasm]Yeah, I am sure that my sabjiwala will really rue the drop in valuation of his handcart.[/sarcasm]

[Suraj]

MohdKav, no more about RTE here. Thanks.

[nirav]

Do you run a school run totally on black money?

Else babbling about RTE on and on and on makes no sense!

You and I don't know the impact on property valuations, but you have somehow linked it to schools shutting down because of RTE.

I can't state any more clearly how ridiculous your illogical deductions are.

If you think with a calm mind, you could probably see that instead of lap market or schools being hit, if real estate valuations take a big plunge, it would be the banking sectors home loans portfolio who's risk profile will increase.

Quit quoting RTE like Rahul Gandhi quoted RTI.

[Bart S]

Agreed that those people who already have this undisclosed wealth in non-currency forms like say gold, diamonds or real estate held through benamis - are not getting hit in this so called 'black money surgical strike'.

Even these folk though not as badly impacted as those hoarding cash, will find it harder to liquidate and sell their assets, since traditionally the people buying such stuff have paid in cash. So it hits them as well, at least in the short to medium term.

[rohitvats]

<SNIP> The 1 canal house in Sector-35 that my uncle was forced to buy for rs 15,000 in 1965 is now Rs 25 Crores. He is retired in that house and even when he stands outside his house strangers come in asking to rent/buy. It seems like whole of Haryana and Punjab wants to move to Chandigarh/Mohali/Panchkula. Real estate market is still booming there.

With respect to the bold part, NOPE! flat as a pancake.

Your property or the one mentioned above fetches strong demand and seemingly mind-boggling prices because it is situated in a very premium area. Where there is simply no scope of fresh supply. Especially of larger sized plots like what you've mentioned. Its like having money and wanting to buy real estate on Aurangzeb Road or Lodhi Road in Delhi. 1 kanal is 5,445 sq.ft You can build a 10,000+ sq.ft bungalow/kothi on this land parcel.

Plus, especially Punjab has this trend that the elite want to have presence in Chandigarh proper. So, it is not surprising that people with real money want to buy out your or your uncle's property.

[Manish_Sharma]

http://indiatoday.intoday.in/story/new- ... 05838.html

The Reserve Bank of India is introducing new design banknotes in the denomination of Rs 2000 as part of Mahatma Gandhi (New) Series. The new denomination has motif of the Mangalyaan on the reverse, depicting the country's first venture in interplanetary space. The base colour of the note is magenta. The note has other designs, geometric patterns aligning with the overall colour scheme, both on the obverse and the reverse. The size of the new note is 66mm x 166mm

Features of the New Rs 2000 Note

Obverse

1. See through register with denominational numeral 2000 can be seen when the note is held against light

2. Latent image with denominational numeral 2000 which can be seen when the banknote is held at 45 degree angle at the eye level

3. Denominational numeral 2000 in Devanagari

4. Portrait of Mahatma Gandhi in the centre

5. Micro letters 'RBI' and '2000'

6. Colour shift windowed security thread with inscriptions 'Bharat', RBI and 2000. Colour of the thread changes from green to blue when the note is tilted

7. Guarantee Clause, Governor's signature with Promise Clause and RBI emblem towards right

8. Mahatma Gandhi portrait and electrotype (2000) watermarks

9. Number panel with numerals growing from small to big on the top left side and bottom right side

10. Ashoka Pillar emblem on the right

For visually impaired

11. Raised printing of Mahatma Gandhi portrait, Ashoka Pillar emblem, based and identification mark

12. Horizontal rectangle with Rs 2000 in raised print on the right

13. Seven angular bleed lines on left and right side in raised print

Reverse

14. Year of printing on the note

15. Swachh Bharat logo with slogan

16. Language panel towards the centre

17. Motif of Mangalyan - reflecting country's first venture in the interplanetary space

Features of the new Rs 500 notes:

New Rs 500 currency note.

The new Rs 500 notes are different from the present series in colour, size, theme, location of security features and design elements. The size of the new note is 63mm x 150mm. The colour of the notes is stone grey and the predominant new theme is Indian heritage site - Red Fort.



Obverse:

1. See through register in denominational numeral.

2. Latent image of the denomination numeral.

3. Denomination numeral in Devanagari.

4. Orientation and relative position of Mahatma Gandhi portrait changed.

5. Windowed security thread changes colour from green to blue when note is tilted.

6. Guarantee clause, Governor's signature with promise clause and RBI emblem tilted towards right.

7. Portrait and electrotype watermarks.

8. Number panel with numerals growing from small to big on the top left side and bottom right side.

9.Denomination in numerals with rupee symbol in colour changing ink (green to blue) on bottom right.

10. Ashoka pillar emblem on the right.

For visually impaired:

Raised printing of Mahatma Gandhi portrait, Ashoka pillar emblem, based and identification mark.

11. Circle with Rs 500 in raise print on the right.

12. Five bleed lines on left and right in raised print.

Reverse

13. Year of printing of the note on left.

14. Swachh Bharat logo with slogan.

15. Language panel towards centre.

16. Red Fort- an image of Indian heritage site with Indian flag.

17. Denomination numeral in Devanagari on right.

[Manish_Sharma]

Eightfold Path :

1. SC-monitored SIT on Black Money

The first such initiative came when the Narendra Modi Government, in its very first Cabinet meeting, constituted a Supreme Court-Monitored Special Investigation Team (SIT) on Black Money.

2. Jan Dhan Yojana

This was followed by the launch of the Pradhan Mantri Jan Dhan Yojaya (PMJDY) on August 28, 2014. Prime Minister Narendra Modi took personal personal interest in the scheme. He made it a mission to ensure that the scheme was successful. The scheme will be of immense help in the present circumstances. Now that Rs 500 and Rs 1000 currency denomination notes have been banned, transactions from banks will acquire importance. Opening of accounts even in the remote areas will help the rural villagers. They will not feel the pinch of the banning of the currency notes.

Had the bank accounts not been opened, the people would have faced immense problems. But not now, at least for those who have bank accounts. Till date, 25.45 crore accounts have been opened so far and Rs 45,302.48 crore has been deposited in these accounts. A total of 20.28 crore accounts have been opened in the public sector banks - 11.39 crore accounts in the rural areas while 8.90 accounts in the urban areas.

Also read: Rs 500, Rs 1000 notes illegal from midnight, ATMs won't work tomorrow: PM Modi

A total of 4.30 crore accounts have been opened in the Regional Rural Banks - 3.70 crore in the rural areas and 0.60 crore in the urban areas. As far as the private banks are concerned, a total of 0.86 crore banks have been opened - 0.53 crore in the rural areas and 0.34 crore accounts in the urban areas.

Hence, a whopping 15.62 crore accounts have been opened in the rural areas and 9.83 crore accounts have been opened in the urban areas.

3. Renegotiation of Tax Treaties and Automatic Information Exchange Agreements with Tax Havens

The government renegotiated the Double Tax Avoidance Agreement (DTAA) with Mauritius to impose Capital Gains Tax if such Capital Asset is situated in India. The Narendra Modi Government also negotiated an Automatic Information Exchange Agreement with Switzerland. Agreements are also being negotiated with other tax havens. From 2017, Organisation of Economic Cooperation and Development (OECD) countries have agreed to share information on foreign account holders with their home countries.

4. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 for Foreign Black Money

4. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 for Foreign Black Money

The scheme was launched to bring back black money stashed in foreign countries and tax havens. The scheme ended on 30 September, 2015. The Act also had various stringent provisions for penalty and prosecution of foreign black money holders unearthed during future investigation by the tax department.

5. Income Disclosure Scheme, 2016

The Income Declaration Scheme (IDS) which opened on June 1 gave a chance to black money holders to come clean by declaring the assets by September 30 and paying tax and penalty of 45 per cent on it. The Narendra Modi Government wanted to capture the entire parallel economy flowing in the system of Rs 7 lakh crore in India. The government was upset with the output of IDS scheme. Though the Income Tax department had identified 90 lakh high value transactions without PAN, the final disclosure of black money was to the tune of Rs 65,250 crore.

Also read: Here is what PM Modi said about the new Rs 500, Rs 2000 notes and black money

6. Penalty on Real Estate Transactions undertaken in Cash exceeding Rs 20,000

The Narendra Modi Government imposed a penalty of 20 per cent on all cash transactions exceeding Rs 20,000 to purchase or sell a property (real estate). This was aimed at curbing the role of black money in real estate transactions.

7. Tax Collection at Source on Cash Sales exceeding Rs 2 lakh

Another important step to check high value cash transactions and create an audit trail was to impose Tax Collection at Source at a nominal rate of 1 per cent on cash purchases exceeding Rs 2 lakh.

Also read: PM Modi's rupee revamp: Don't worry your money stays your money

8. Benami Transaction (Prohibition) Amendment Bill

The Parliament passed the Benami Transactions (Prohibition) Amendment Act, 2016 (BTP Amendment Act) in August. It came into force from November 1, 2016. The new law seeks to give more teeth to the authorities to curb benami transactions. The notification issued by the Income Tax department, stated that after coming into effect, the BTP Amendment Act, the existing Benami Transactions (Prohibition) Act, 1988, shall be renamed as Prohibition of Benami Property Transactions Act, 1988 (PBPT Act).

http://indiatoday.intoday.in/story/prim ... 05904.html

[saip]

What is this buzz about RFID?

[Cosmo_R]

" SaraLax wrote: Agreed that those people who already have this undisclosed wealth in non-currency forms like say gold, diamonds or real estate held through benamis - are not getting hit in this so called 'black money surgical strike'.

But they will when they try to cash it in. There won't be any buyers with 'black money'. Which is going to result in asset price re-calibration. The "I'll give you the 75% in 24 carat gold lotas" in addition to the nominal (white money) purchase price of 25%" will now transfer illiquidity to the seller.

The biggest short impact will be on the Yadavs in UP who were planning to buy the election with free cell phones and on INC, and in fact, all political parties who 'buy' votes. You can still have 'black money' transactions, it's just that you now need a truck to carry the cash.

This demonetization does not cause anyone who has INR 500/1000 notes to lose money, they simply have to turn up at a bank and exchange them for the new notes. Anyone with nothing to hide has nothing to fear or lose.

[Bart S]

What is this buzz about RFID?

Just a rumor that idiots keep re-posting from Whatsapp or Facebook or wherever else this rubbish circulates.

[JohnTitor]

I find it interesting that there are some people here who are quite vocal in criticising this move... very interesting indeed. Poor black money holders - NOT!

[rohitvats]

On the real estate sector, please go easy on this crash bit.

In any market, there is a ratio of genuine end-users to investors. A speculative market has more of the latter while a more balanced market has more of the former. It is when the ratio gets tilted towards investors that you've the bull run in property prices.

And what fuels the investors and bull-run? Loads of black-money!

But the market have been flat for 2+ years now. While the developers might not have explicitly reduced the prices, the prices have seen implicit correction. If you index property prices to inflation, you'll see that most of the stock is actually selling at same price as was two years earlier. Or in some cases, the price post adjustment to inflation has actually gone down.

Similarly, in the secondary or resale market, the prices have remained stagnant or actually come down.

On an average, realty market has not even given 5% return per annum over last three years.

What this means is that investors and speculators have long exited the market. The impact of today's decision would've been felt strongly if it would've sucked out the money chasing real estate asset class. This would've led to some price correction. But that money is simply not there.

So, IMO, take a chill-pill; property prices are not going to fall through the roof! There is another very big reason for it - the stock in the market is not homogeneous. But explaining that will take a long time. Some time later.

BTW, I'm witnessing signs of slight uptick in the property purchase. Only purchase, mind you. Not prices.

Thing is, people have become very vary of construction or delivery risk. Developers have delayed projects and many buyers + investors are stuck. Genuine end-users end up with twin burden of EMI + monthly rental due to project delay. This made many first time buyers to put off their purchases.

But what is happening now is that many of these much delayed projects have reached completion/occupancy or will be doing so in H2-2016 or 2017. Genuine end-users are opting for such projects where there is minimal delivery risk. In fact, I've observed that ready-to-move properties have slight premium over under-construction properties.

[Lilo]

Not happy with the security features of new notes.
I was expecting on the lines of plastic/polymer currency notes...

Only a matter of time before the fakes for the new notes too start flooding in.Although we will be safe for the short term (i.e <5years) .

These measly change/upgradations in security features makes sense only if the GOI is determined to transition to cashless in most of the transactions above 500 rs & 1000 rs levels by medium term (i.e >5years).Only in that case investing in new polymer note printing setups in our mints is useless - else we should have been printing polymer notes (atleast for higher denominations) 5 years back.

So the longterm success of this surgical strike will depend on the speediness with which GOI drags in the cashless society.

[Yayavar]

What is this buzz about RFID?

Just a rumor that idiots keep re-posting from Whatsapp or Facebook or wherever else this rubbish circulates.

heh heh! I just received a whatsapp from a techie friend that Rs2000 note has embedded 'nano gps'....

[shynee]

Few questions.

1)Hypothetical question. Can this process be reversed ? I mean bring the Demonetized money back into circulation by a new government in 2019 ?

2) This question was asked before by Narmad , but no one responded yet. What is the immediate and long term impact on exchange rate ? Will it strengthen against other currencies ?

3) Which countries in recent time did Demonetize the currency and what was the impact(Positive and Negative) ?

CBN(Chandrababu Naidu) was saying about removing Rs 500/1000 from circulation few days ago. Was he aware of this impending action ? Just specualating myself

[SaraLax]

That aside, it still doesn't change what I said about INR becoming practically untrustworthy. This is a step back in 4 decades wrt monetary policy. No body, who is following this in their right mind will trust INR now considering how surprisingly this was implemented. We need Inr to be at the level of trustworthiness of the USD ,not make it equivalent to Zimbabwean $ subject to whims and sizes of politicians

On the contrary, the INR will rise in value because there are fewer notes in circulation. The black economy is millions of banknotes circulating (some of them fake) outside of the control of the central bank. .....

Interesting that you mention Zimbabwe, the poster child of hyperinflation and unrestrained printing of progressively higher denominations. Exactly the example to use when discussing the opposite - a *deflationary* act. Makes no sense at all. Interestingly, the US did exactly the same thing Modi just did, during the reconstruction era, by curtailing higher value denominations. At one time, they had $500-$10000 banknotes in circulation too. So this means we should turn into an economic basketcase like the US became.

Well technically what current NDA govt is doing is not the same as what the US did as you had mentioned ... as in our case we will have a newer set of 500 & 2000 INR notes as replacements in near future.

But read the below article to understand what the European Union's ECB is implementing - to end issuance of 500 EU$ Notes - because they found that it was easy for use in criminal and illegal activities.

MAY-2016 : Europe to Remove 500-Euro Bill, the ‘Bin Laden’ Bank Note Criminals Love

In a move aimed at hampering cash transactions by terrorists, drug dealers and money launderers, the European Central Bank on Wednesday announced an end to the 500-euro bank note, worth roughly $575.

When it comes to moving money nefariously, the €500 note has been especially handy.

It is a large denomination in a widely circulated and easily convertible currency. In the United States, the largest denomination is $100, after the Federal Reserve discontinued the $500, $1,000, $5,000 and $10,000 bills in 1969. Switzerland has a 1,000-franc note, worth about $1,050, but its supply is limited.

The €500 note is also more compact and convenient for evading the gaze of authorities. The equivalent of $1 million, in that high euro note, weighs about five pounds and fits in a small bag, according to a Harvard University study this year.

After the European Central Bank phases out the €500 note by the end of 2018, the next highest denomination will be €200. That same $1 million would weigh roughly two and half times as much.
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The European Central Bank said it would not take the more radical step of declaring that €500 bills are no longer legal tender. Such a move would have meant the notes could no longer be legally used for transactions. People with €500 notes would have had to bring them back to a central bank to be exchanged for smaller denominations.

Mr. Sands said the central bank could take steps to discourage use of the notes still in circulation, for example, by requiring banks to ask questions when customers present €500 bills for deposit.
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So does the above mean that the Euro $ will loose its trustworthiness ?.

[Yagnasri]

I am not sure it will be a major problem in the long run for people. But in short run, it will be a problem. As I posted before my mother is in hospital and I, have to pay. I have money but white. If Doctor wants cash payment, I can not make it. Now doctor needs to change and ask for white which I am sure in time they will. But in the short term, it will be a problem for me one or two days.

Otherwise, I have some 5k cash with me and rest is in the bank account. So no issue there other than want we can do to pay the taxiwala etc. Nothing big.

[SaraLax]

Few questions.

1)Hypothetical question. Can this process be reversed ? I mean bring the Demonetized money back into circulation by a new government in 2019 ?

2) This question was asked before by Narmad , but no one responded yet. What is the immediate and long term impact on exchange rate ? Will it strengthen against other currencies ?

3) Which countries in recent time did Demonetize the currency and what was the impact(Positive and Negative) ?

CBN(Chandrababu Naidu) was saying about removing Rs 500/1000 from circulation few days ago. Was he aware of this impending action ? Just specualating myself

I now feel that the Hyderabad guy or was it an entity - who/which indicated nearly 10K Crores of undeclared income in the last days of September - may have been potentially tipped off by someone about the impending demonetization of 500/1000 INR Notes. The Hyderabad entity went through and disclosed the large sum of undeclared money and saved some 55% of that chunk.

[Rishirishi]

Speculating on the value of illiquid investments is pointless. The middle class families are not putting their homes on the market en masse tomorrow. If their appraised value falls, they correspondingly pay less in property taxes. Buyers with white money benefit from lower prices.

Similarly, the price of gold is held up by a black economy that's 30-50% of the regular one. That's cash floating about keeping the value of gold up. If the big fishes hold their holdings in gold, they cannot unload it into a more liquidity constrained white market without taking a huge haircut in nominal value.

It's fundamentally impossible to fix the black money problem without asset price recalibration. How on earth did people think it would work otherwise ? The bad guys would be rounded up and everything would work just as before with no perceptible change ? The black economy is hundreds of billions worth of cash floating about, distorting the price of everything. Any attempt to tackle it necessarily results in asset price recalibration. It's unavoidable.

The arguments against this move is that the prices of a lot of things will change dramatically. Sure it will. It's also true that the value of each rupee will rise significantly, because there's less liquid rupee chasing each $/Euro/gram of gold/bitcoin, i.e. the purchasing power of the Rupee rises as a result of this. This move is deflationary. Everything falls in *price*, not in *value*. The purchasing power of each Rupee rises in the process.

Regarding value remaining same - no it won't. Only the prices of real estate will fall on relation to a lot of other commodities. So say a middle class who had invested in gold vs middle class invested in house, when price of house falls in rupee while the gold doesn't(and actually increases), there is a net loss in value for the guy holding the house. So no, your point is wrong .

That aside, it still doesn't change what I said about INR becoming practically untrustworthy. This is a step back in 4 decades wrt monetary policy. No body, who is following this in their right mind will trust INR now considering how surprisingly this was implemented. We need Inr to be at the level of trustworthiness of the USD ,not make it equivalent to Zimbabwean $ subject to whims and sizes of politicians

Have to disagre. keeping black money will become untrustworthy. Think of this as a 100% tax on all black money.
However i do see a danger of a significant drop in GDP growth, unless Modi at the same time pumps in a hell of a lot of money into the economy, for example infrastrucrue.

This is only a one off ting and does not adress the fundamental issue of black money. But knowing Modi he probably has planned other anti corruption schemes.

As for the rupee, i think it will strengthen itself. Demand for gold and other things will drop and this will impact the imports.

All in all i think this is a part of a bigger plan which include cripling political opponents (they wont have the money), making housing more affordable, fixing the balance of payments as well as print money to build infrastructure.

[nirav]

The dabba market will take a huge hit as a result of this.
The bookies too.

It will be interesting to see change in turnover for nse and mcx in the coming months..

[Suraj]

On the contrary, the INR will rise in value because there are fewer notes in circulation. The black economy is millions of banknotes circulating (some of them fake) outside of the control of the central bank. .....

Interesting that you mention Zimbabwe, the poster child of hyperinflation and unrestrained printing of progressively higher denominations. Exactly the example to use when discussing the opposite - a *deflationary* act. Makes no sense at all. Interestingly, the US did exactly the same thing Modi just did, during the reconstruction era, by curtailing higher value denominations. At one time, they had $500-$10000 banknotes in circulation too. So this means we should turn into an economic basketcase like the US became.

Well technically what current NDA govt is doing is not the same as what the US did as you had mentioned ... as in our case we will have a newer set of 500 & 2000 INR notes as replacements in near future.

But read the below article to understand what the European Union's ECB is implementing - to end issuance of 500 EU$ Notes - because they found that it was easy for use in criminal and illegal activities..

It's the same process , just earlier along. You can't remove the higher denominations immediately. You first swap them out and make the old series invalid. Simultaneously you require all high value transactions to be recorded using the PAN. Then you phase out the new higher value series and keep only the lower value notes.

The first step is to gain control over the floating monetary base. Then you can implement further measures. We have about 30-50% of our economic activity conducted in cash that RBI never sees. All the higher denomination notes feeding that will now either come in (and be destroyed) or will be destroyed by the holders. It took the US decades to do this too.

The Euro is not even a two decade old currency, and quite a modern one. They already had the chance to implement one currency swap when they switched to it in the very recent past (<20 years ago).

[hanumadu]

Few questions.

1)Hypothetical question. Can this process be reversed ? I mean bring the Demonetized money back into circulation by a new government in 2019 ?

May be its a good idea to buy a bunch of 1000 re bills on the rupee. or by the kilo.


What is the effect of losing say 5 lakh crores of rupees from the economy. That money was earned through enterprise and though it is currently dormant, it would have been pumped into the economy at some point of time. Is that money lost by the country as a whole? Can it be salvaged some how?

[saip]

How about if the Government offers to buy these defunct notes at 10 paise to the rupee, no questions asked? In effect whiting at 90% tax.

[Lilo]

... as in our case we will have a newer set of 500 & 2000 INR notes as replacements in near future.

I think the govt is going to drastically reduce the number of these new series notes which are going to be in circulation - in comparision to the numbers of old series notes in circulation.
As per estimates of currency value of old series notes(info found on twitter):
Rs 1000 notes :Rs 6 lakh crore
Rs 500 notes :Rs 8 lakh crore

Total = :Rs 12 lakh crore.

All this money has been demonetized and will be later burnt up..

Now Govt has said that per individual after showing ID proof only Rs 4000 old series will be exchanged into new series cash notes,without depositing into a bank account till Nov 24.Rest all must be deposited into bank accounts with Id proof by Dec 30.

Now can anyone estimate the factor by which the Rs 12 Lakh crore old series cash will be reduced in circulation & converted into electronic money(i.e bank deposits) + old & additionally printed petty cash denominations (100s,50s & 10s) ?.

Iam wildly guessing the circulation of new series high value notes will be quite less than Rs 50 thousand crore one year from now in our economy (i.e 24 times reduction in the high denomination currency in circulation).

[Suraj]

How about if the Government offers to buy these defunct notes at 10 paise to the rupee, no questions asked? In effect whiting at 90% tax.

How about if the Government does what it just did instead ? They owe no arbitrary tax waiver (10% in your example) to anyone. They already very recently conducted an income disclosure scheme. Anyone with black money could have gotten away with a lot less in terms of tax and fees then. Now GoI doesn't owe anyone even a 10% rebate.

[Yagnasri]

FREQUENTLY ASKED QUESTIONS
FAQs on Withdrawal of Legal Tender Character of the existing Bank Notes in the denominations of ₹ 500/- and ₹ 1000/-
1. Why is this scheme introduced?
The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced.
2. What is this scheme?
The legal tender character of the existing bank notes in denominations of ₹500 and ₹1000 issued by the Reserve bank of India till November 8, 2016 (hereinafter referred to as Specified Bank Notes) stands withdrawn. In consequence thereof these Bank Notes cannot be used for transacting business and/or store of value for future usage. These Bank Notes can be exchanged for value at any of the 19 offices of the Reserve Bank of India or at any of the bank branches or at any Head Post Office or Sub-Post Office.
3. How much value will I get?
You will get value for the entire volume of notes tendered at the bank branches / RBI offices.
4. Can I get all in cash?
No. You will get upto ₹4000 per person in cash irrespective of the size of tender and anything over and above that will be receivable by way of credit to bank account.
5. Why I cannot get the entire amount in cash when I have surrendered everything in cash?
The Scheme does not provide for it, given its objectives.
6. ₹4000 cash is insufficient for my need. What to do?
You can use balances in bank accounts to pay for other requirements by cheque or through electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards etc.
7. What if I don’t have any bank account?
You can always open a bank account by approaching a bank branch with necessary documents required for fulfilling the KYC requirements.
8. What if, if I have only JDY account?
A JDY account holder can avail the exchange facility subject to the caps and other laid down limits in accord with norms and procedures.
9. Where can I go to exchange the notes?
The exchange facility is available at all Issue Offices of RBI and branches of commercial banks/RRBS/UCBs/State Co-op banks or at any Head Post Office or Sub-Post Office.
10. Need I go to my bank branch only?
For exchange upto 4000 in cash you may go to any bank branch with valid identity proof.
For exchange over 4000, which will be accorded through credit to Bank account only, you may go to the branch where you have an account or to any other branch of the same bank.
In case you want to go to a branch of any other bank where you are not maintaining an account, you will have to furnish valid identity proof and bank account details required for electronic fund transfer to your account.
11. Can I go to any branch of my bank?
Yes you can go to any branch of your bank.
12. Can I go to any branch of any other bank?
Yes, you can go to any branch of any other bank. In that case you have to furnish valid identity proof for exchange in cash; both valid identity proof and bank account details will be required for electronic fund transfer in case the amount to be exchanged exceeds ₹4000.
13. I have no account but my relative / friend has an account, can I get my notes exchanged into that account?
Yes, you can do that if the account holder relative/friend etc. gives you permission in writing. While exchanging, you should provide to the bank, evidence of permission given by the account holder and your valid identity proof.
14. Should I go to bank personally or can I send the notes through my representative?
Personal visit to the branch is preferable. In case it is not possible for you to visit the branch you may send your representative with an express mandate i.e. a written authorisation. The representative should produce authority letter and his / her valid identity proof while tendering the notes.
15. Can I withdraw from ATM?
It may take a while for the banks to recalibrate their ATMs. Once the ATMs are functional, you can withdraw from ATMs upto a maximum of ₹2,000/- per card per day upto 18th November, 2016. The limit will be raised to ₹4000/- per day per card from 19th November 2016 onwards.
16. Can I withdraw cash against cheque?
Yes, you can withdraw cash against withdrawal slip or cheque subject to ceiling of ₹10,000/- in a day within an overall limit of ₹20,000/- in a week (including withdrawals from ATMs) upto 24th November 2016, after which these limits shall be reviewed.
17. Can I deposit Specified Bank Notes through ATMs, Cash Deposit Machine or cash Recycler?
Yes, Specified Bank Notes can be deposited in Cash Deposits machines / Cash Recyclers.
18. Can I make use of electronic (NEFT/RTGS /IMPS/ Internet Banking / Mobile banking etc.) mode?
You can use NEFT/RTGS/IMPS/Internet Banking/Mobile Banking or any other electronic/ non-cash mode of payment.
19. How much time do I have to exchange the notes?
The scheme closes on 30th December 2016. The Specified banknotes can be exchanged at branches of commercial banks, Regional Rural Banks, Urban Cooperative banks, State Cooperative Banks and RBI till 30th December 2016.
For those who are unable to exchange their Specified Bank Notes on or before December 30, 2016, an opportunity will be given to them to do so at specified offices of the RBI, along with necessary documentation as may be specified by the Reserve Bank of India.
20. I am right now not in India, what should I do?
If you have Specified banknotes in India, you may authorise in writing enabling another person in India to deposit the notes into your bank account. The person so authorised has to come to the bank branch with the Specified banknotes, the authority letter given by you and a valid identity proof (Valid Identity proof is any of the following: Aadhaar Card, Driving License, Voter ID Card, Pass Port, NREGA Card, PAN Card, Identity Card Issued by Government Department, Public Sector Unit to its Staff)
21. I am an NRI and hold NRO account, can the exchange value be deposited in my account?
Yes, you can deposit the Specified banknotes to your NRO account.
22. I am a foreign tourist, I have these notes. What should I do?
You can purchase foreign exchange equivalent to ₹5000 using these Specified Bank Notes at airport exchange counters within 72 hours after the notification, provided you present proof of purchasing the Specified Bank Notes.
23. I have emergency needs of cash (hospitalisation, travel, life saving medicines) then what I should do?
You can use the Specified Bank Notes for paying for your hospitalisation charges at government hospitals, for purchasing bus tickets at government bus stands for travel by state government or state PSU buses, train tickets at railway stations, and air tickets at airports, within 72 hours after the notification.
24. What is proof of identity?
Valid Identity proof is any of the following: Aadhaar Card, Driving License, Voter ID Card, Pass Port, NREGA Card, PAN Card, Identity Card Issued by Government Department, Public Sector Unit to its Staff.
25. Where can I get more information on this scheme?
Further information is available on our website (www.rbi.org.in) and the website of the Government of India (www.finmin.nic.in)
26. If I have a problem, whom should I approach?
You may approach the control room of RBI by email or on Telephone Nos 022 22602201/022 22602944

[hanumadu]

How about if the Government offers to buy these defunct notes at 10 paise to the rupee, no questions asked? In effect whiting at 90% tax.

Eventually, after the dust settles, the govt may bring another income disclosure scheme at a higher tax rate than the 45% earlier.

[bhavani]

I am not a bhakt by any stretch, I am from South India. But i really appreciate this move by Modi. This black money has become a menace for salaried folk.

In Cities of Andhra, big business folks, cinema folks, Real estate folks, gold shop owners own thousands of crores of cash and most of this cash is stacked in bundles and is stashed everywhere from beds to even boxes full of cash in godowns.

This black cash is increasing the price of a lot of things like real estate, cattle, and farm land without a valid reason. This in fact drives the inflation.

Irrespective of party we all should support this move to block black money. All those suckers with stashes of cash in beds and garbage bags can go burn it or sell it in Kilos.

My Dad who was bank manager once saw a ware house of a major mall owner in Andhra which had jute bags full of cash. There is tons of black money all across andhra, telangana. I feel these guys are really screwed in terms of amount of cash they can convert to white.