Kudos to our Prime Minister Mr Narendra Modi. This “surgical strike” against black money is a very bold move for the Indian economy. The Government has announced that, existing Rs 500 and Rs 1,000 currency notes will no longer be legal tender from 9th November, 2016.
- Currency notes of Rs 500 and Rs 1,000 denominations will not be legal from 9th November.
- New notes of Rs 500 and Rs 2,000 would be released and circulated from 10th November.
- ATMs will not work on 9th November and at some places on 10th November as well.
- People can deposit notes of Rs 1,000 and Rs 500 in their banks from 10th November till 30th December, 2016.
- Those unable to deposit Rs 1,000, Rs 500 notes by 30th December for some reason, can change them till 31st March, 2017 by furnishing ID proof.
- All banks and post offices will remain shut on 9th November.
- For 72 hours, Government hospitals will accept the old notes of Rs 500 and 1000 notes for payment.
- For 72 hours, railway ticket booking counters, ticket counters of government buses and airline ticket counters at airports will accept the old notes for purchase of tickets.
- For 72 hours, old Rs 500 and Rs 1,000 notes will be accepted at petrol, diesel and gas stations authorized by public sector oil companies; Consumer co-operative stores authorized by State or Central Government; Milk booths authorized by state governments.
- Some medical facilities will be exempted from this for the time being.
- From 10th November to 24th November the limit for exchange of old note will be Rs 4,000 for cash over the counter of these bank branches, which will be increased from 25th November to 30th December.
- Cash withdrawals from ATMs will be restricted to Rs 2,000 per day per card up to 18th November 2016 and the limits shall be raised to Rs 4,000 per day per card from 19th November 2016.
- Valid ID card would be needed for exchanging old notes for cash.
- Cash withdrawals from bank accounts, over the bank counters, will be restricted to a limited amount of Rs 10,000 per day subject to an overall limit of Rs 20,000 a week from 9th November 2016 till 24th November 2016. The limits will be reviewed after this.
- No changes in online, card, cheque or any other plastic money transactions.
- Any person who is unable to exchange or deposit the specified banknotes in their bank accounts on or before December 30, 2016 shall be given an opportunity to do so at specified offices of the Reserve Bank or such other facility until a later date as may be specified by the Reserve Bank.
- Banks to remain open for public on Saturday, 12th November and Sunday, 13th November.
Impact on Economy: The long term impact will be positive for economy. It could immediate increase bank deposits because most of the holders of these old notes decide to deposit them rather than exchanging them for new notes. The black money was associated with higher inflation. However, it is likely to hurt near-term consumption demand. Residential real estate demand will hurt for some time.
Impact on Markets: Indian equity markets reacted negatively this news but we will see long term benefits. The negative reaction from market created an opportunity to buy at lower levels for long term perspective.
Positive Impact on Sectors:
- Banking Sector: Government’s sustained focus on eradicating black money from the economy is a big positive for the Indian banking system in the medium term. Banks stand to gain in the medium-term as they could enjoy higher deposit (savings) balances and transaction volumes, lower cash handling costs and greater acceptance of digital channels.
- NBFCs: Interest rates will continue their slow grind downwards as money supply in the formal economy increases. This will help wholesale borrowers like NBFCs. Also, ban on high denomination currency could benefit them by getting good business in terms of secondary products like insurance, asset wealth management through higher financial savings.
- Gold Finance Companies: Gold monetization to set to increase in the next few months. These would largely be higher ticket transactions and carry lower rates of interest, leading to higher volumes but lower yields margins.
- Building Material Suppliers: At present, the market share for the organised sector is about 60%. Once black money is curbed, price difference amongst the unorganised sector and the organised sector narrows. This will improve opportunities for the organised sector.
Negative Impact on Sectors:
- Real Estate Sector: The real estate sector will hurt the most because large non banking transactions takes place in this sector and expected real estate prices will fall in near term future.
- Infrastructure Sector: This is another sector where we can see short term downtrend with this news. It may get impacted by slow demand in near to medium term as all transaction to service providers like architect, carpenter, painter, labor will get impacted as a large proportion of service providers don’t provide bills.
- Cement Sector: The demand in cement sector will hit as 70% of cement is consumed by the housing sector. Cement producers will cut production and take some price impact too.
- Housing Finance Companies: HFC’s will likely see stress on loans given to real estate developers, who will face liquidity crunch in the short term.
- Auto Sector: The sales of auto companies’ takes place on cash basis and that will negatively impact the sector. Liquidity crunch will likely impact vehicles demand.
- Durables and Non-Durables Sector: This sector will face short term negative impact as there is a temporary slowdown in spending.
- Jewellery Sector: Buying and selling of Jewellery is highly dependent on banks may see depressed earnings in the medium term.
Sectors Unaffected: IT, Utilities and Telecom companies have nearly cashless transactions with payments through electronic mode. While the impact of the termination of the existing high-denomination notes will be negligible, companies will continue to react to sector-specific triggers.