In one of the historical reforms of the economy of India, 500 and 1,000 notes were banned, effective from 08th Nov 2016 Tuesday midnight. There are few reasons behind this bold movement.
• Increased fake higher denomination currency notes
• Misused by Terrorist for hoarding Black Money
IndiaIn one of the historical reforms of the economy of India,
500 and 1,000 notes were banned effective 08 Nov
2016 Tuesday midnight.
This was one of the boldest movements by the
Government of India announced over a 40-minute
The majority of industry and commoners alike reacted to
this decision with overwhelming support.
Whereas some sections are of the opinion that it is a
draconian scheme causing hardships to people.Why the ban and what it is all about?• Increased fake higher denomination currency
• Fake notes used for Anti-National & Illegal
• Misused by Terrorist for hoarding Black Money.
• Non-Disclosure of Source of Income
• To stop Illegal funding to political parties during
• To encourage cashless transactionsContinued…
As per this scheme the legal tender character to the
currency notes in Rs. 500 and Rs. 1000 denominations are
Due to this, the old high denomination notes are invalid
“ and cannot be used for any transactions nor can be stored
as a value for use in the future.
These notes can now be exchanged for the same value
of money at the RBI offices or at various bank and post
People can deposit their old currency till the 30 of
December 2016 in their respective bank accounts.
No restriction on electronic fund payments or transfers
including credit and debit cards including Internet BankingImpact of this decision on Various Sectors:The removal of these 500 and 1000 notes and
replacement of the same with new 500 and 2000 Rupee
Notes is expected to
- Remove black money from the economy as they will
be blocked since the owners will not be in a position to
deposit the same in the banks,
- Temporarily stall the circulation of large volume of
counterfeit currency and
- Curb the funding for anti-social elements like
smuggling, terrorism, espionage, etc. With the older 500 and 1000 Rupees notes being
scrapped, until the new 500 and 2000 Rupees notes get
widely circulated in the market, money supply is
expected to reduce in the short run.
To the extent that black money (which is not
counterfeit) does not re-enter the system, reserve
money and hence money supply will decrease
However gradually as the new notes get circulated in
the market and the mismatch gets corrected, money
supply will pick up.Effect on Prices Price level is expected to be lowered due
to moderation from demand side. This demand driven fall
in prices could be understood as follows:
Consumer goods: Prices are expected to fall only
marginally due to moderation in demand as use of cards
and cheques would compensate for some purchases.
Real Estate and Property: Prices in this sector are largely
expected to fall, especially for sales of properties where
major part of the transaction is cash based, rather than
based on banks transfer or cheque transactions.
In the medium term, however the prices in this sector could
regain some levels as developers rebalance their prices
(probably charging more on cheque payment).The GDP formation could be impacted by this measure,
with reduction in the consumption demand. However with
the recent rise in festival demand is expected to offset this
fall in overall impact.
Moreover, this expected impact on GDP may not be
significant as some of this demand will only be deferred
and re-enter the stream once the cash situation becomes
normal. Share markets will for sure see the impact with the prices
of the shares shooting higher. A negative impact can be
seen on the cash focused sectors in the stock market. This
can trigger to all round selling bringing down the indices
from their present levels.
This move will also impact and lower the political
spending during elections especially in states like Punjab
and UP where huge cash is spent during elections. As directed by the Government, the 500 and 1000 Rupee
notes which now cease to be legal tender are to be
deposited or exchanged in banks (subject to certain limits).
This will automatically lead to more amounts being
deposited in Savings and Current Account of commercial
This in turn will enhance the liquidity position of the
banks, which can be utilized further for lending purposes.
However, to the extent that households have held on to
these funds for emergency purposes, there would be
withdrawals at the second stage. With cash transactions facing a reduction, alternative
forms of payment will see a surge in demand.
Digital transaction systems, E-wallets and apps, online
transactions using E-banking, usage of Plastic money
(Debit and Credit Cards), etc. will definitely see substantial
increase in demand.
This should eventually lead to strengthening of such
systems and the infrastructure required.
paymentA Glance on 2000 Rs. For Security Purpose
• See through register where the numeral 2,000 can be seen when note is held against light.
• Latent image of 2,000 can be seen when the note is tilted.
• Devnagri denomination.
• Portrait of Mahatma Gandhi.
• Micro letters 'RBI' and '2,000'.
• Color shift security thread with 'RBI' and '2,000'.
• Guarantee clause, Governor's signature and RBI emblem on the right.
• Watermarks of Mahatma Gandhi and electrotype 2,000 numeral.
• Number panel with numerals growing from small to big on top left and bottom right
• Denominational numeral with Rupee symbol, 2,000 in colour changing ink.
• Ashoka pillar emblem.
• Rectangle with Rs.2,000 in raised print on right.
• Seven angular bleed lines in raised print.A 2000 Rs. Note⊙Government reveals shocking tax percentage for black
Providing a window to black money holders,
the government proposed to levy a total tax,
penalty, and surcharge of 50 percent on the
amount deposited post demonetization while
higher taxes and stiffer penalty of up to 85
percent await those who don’t disclose but are
caught. The Rupee value will slowly strengthen as the
The inflation too would go down and this would
benefit the middle and the lower class people.
More people will be inclined towards converting
paper to gold and this can increase the investments
made in the gold monetization schemes.
Does this mark the beginning of the end of black
money in India? Let 's wait and watch.