Currently Rs 17,54,000 crore worth of notes are in circulation according to the RBI’s database on the Indian economy.
Of this, Rs 500 notes constituted almost 45% of the currency in circulation while 39% of the notes were of Rs 1,000 denomination. However in terms of volume, Rs 10 and Rs 100 notes constituted 53% of the notes in circulation. From midnight, almost Rs 6,32,600 crore in circulation in the form of Rs 1,000 notes would be illegal tender. To replace them, Rs 2,000 notes would be introduced, which according to the government would be limited in circulation.
RBI data shows, in 2015-16, almost 6.5 lakh counterfeit notes were detected in commercial banks, of which almost 4 lakh were in the Rs 500 and Rs 1,000 category. It is in this context that the government wants to re-monetize the Rs 500 note while de-monetizing the Rs 1,000 note. The number of Rs 100 counterfeit currency was also close to 2 lakh this year. From all, 86% of currency by value in India are of Rs 500 and Rs 1,000 denominations.
- Immediate Impact: Heavy Deflation
- Initially there will be heavy deflation as people who have earned money through illegal means would be afraid to declare the money as they might be prosecuted by Govt/Income Tax Dept on the legitimacy of their income.
- This will reduce the total currency circulation in the economy – leading to deflation. Deflation increases the value of money that we have because the total money supply goes down but the commodities and things available in the market have not gone down.
- Gold prices, stocks & commodities will drop.
- This will also lead to Inflation (not overnight)
- There will be a lot of people who have a lot of cash, legally earned, which they will deposit it in the bank.
- Now the bank with more deposits can do more lending.
- Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.
- Deflation and Inflation will balance out each other in the future.
Some of the benefits of this move can be: (Pros)
- It will help the government to fight Black money, corruption, terrorism and counterfeit currency with one single decision.
- Arms smuggling, espionage and terrorist related activities will be choked due to lack of funding. Counterfeit currencies are being used for financing terrorism which is being run by the enemy in India. Now Government has taken a bold move which enables them to fight counterfeit currency/terrorist funding activities.
- With the new limits on ATM withdrawals being restricted to Rs 2,000 per day, withdrawals from bank accounts limited to Rs 10,000 a day and Rs 20,000 a week, it will drive the card payments across the country (In simpler words card transactions will slowly replace the cash transactions in daily activities).
- It will be easy for the Government to track the money being exchanged as exchange can only be done by producing valid identity cards like PAN, Aadhaar and Election Card from 10 to 24 November with a daily limit of Rs 4000. There is no limit on the amount as long as it is legal.
- FIU of India get info about transactions from banks. During this period, banks will take extra precaution. Banks will share info with Income Tax dept. as deemed fit. (So now it is difficult to get rid of the black money which is mostly in 500 and 1000 notes.
- This decision will help institutionalize the real estate sector bringing more transparency in the Indian real estate industry. This step would give the Indian real estate sector more credibility making it more attractive to the foreign as well as domestic investors.
- Housing prices could witness downward pressure; helping revive demand in the sluggish housing segment (this will give much needed bloodline to the sector)
- It will help the common man by putting an end to the artificial increase in Real Estate, Higher Education and Healthcare transactions bringing them within the reach of the common man.
Yes it’s obviously right! Common man and small vendors have to face difficulties due to this decision but it will definitely help our country for a brighter future. Friends, if our Indian Army is continuously answering cease fire in border areas to protect our country, why we can’t contribute little bit to protect our country? Today’s hard work and difficulties will surely help us to see a better India.