Demonetization of Rs. 500 and Rs. 1000 notes, a watershed movement by Indian government came as a surprise to the entire nation at the stroke of midnight to citizens, entrepreneurs, media houses and even those present within the government. Indian citizens may be divided in their opinions on this issue, but finance giants of the world like World Bank & IMF applaud PM Narendra Modi’s epic decision. According to economists, now, there are better chances for India to emerge as an economic star in the world.

Was this a wise decision? Why was it taken? How it’ll change the life of natives, finance institutes and customers? What will happen to Indian economy? Find answers to important question below.

5 Important Questions About Currency Ban that Haunt All Indians Today

1. Why Did the Centre Rs. 500 and Rs. 1,000 Bills?

In one word: control. It’s essential to control the flow of black money in India. According to FATF (Financial Action Task Force), a global corporation that exercises control on criminal use of international finances says,

“Unaccounted high-value bills invested in real estate, corporate and major industries are used for money-laundering schemes, smuggling, prostitution, drug trafficking and racketeering.”

70% of ‘black money’ circulates within India whereas foreign investments and Swiss bank depository amounts to 19% and 1% only. In his speech, Modi specifically pointed that Rs. 500 and Rs. 1,000 notes are largely used to fund terrorism, crimes and corruption in India. Even political parties spend 30 to 50 thousand crores during election season though the official spending limit set by election commission is just Rs. 7,000 to 8,000 crores.

RBI reveals that approximately 6.7 billion ‘1000 rupee’ notes and 16.5 billion ‘500 rupee’ notes are in circulation. The numbers are mind-boggling. While we can estimate the number of physical notes in circulation, it’s difficult to estimate the value of other forms of unaccounted-for assets like land, property, gold and ornaments. But, this would obviously help the government control hard cold cash.

2. How will it Affect the Value of Indian Currency?

The value of a currency is determined by the following factors:

  • Inflation Rates (more the number of votes, greater the chances of depreciation in value),
  • Interest Rates (on savings, finance and forex investments),
  • Country’s current account balance (total amount deposited in banks),
  • Infiltration of fake currency in system,
  • Terms and conditions of trade,
  • Recession, Government debts and political performance.

Introducing new currency in the market will pay a significant role in uplifting the status of Indian currency in international market. Prohibition of high-value currency will have short-term negative impact on small/micro and rural businesses, but it’ll not cause bigger damages to the working class. It may cause sudden fluctuations in stock prices, but they would stabilize with time. In future, Indian currency will surface as a high-value currency in the international market.

3. How will it Affect the Existing Markets?

Real estate, precious metals and industry stock prices will gradually drop due to less number of investors investing money in these assets. Consequently, gold prices will depreciate and plots/houses will become cheaper. More people, especially the middle and lower classes will be able to invest in gold and property. This will help reduce existing inequality in country.

Next couple of months would be difficult for gold traders and property vendors. Real estate market will stabilize over time, due to rent-ratio and aesthetics whereas the price of other assets will be determined by investments and transactions.

4. Will The Common Man be Affected by This?

Yes, they would, negatively as well as positively. The news was unexpected, so majority of businessmen, working professionals and students didn’t get time to replace bigger notes with change, as banks and ATMS ran out of money last night. It’s a challenging situation for families who’re planning events, wedding and major business ventures in next 2 days. All ATMs and banks will shut down monetary transactions for 48 hours. General public will face inconvenience while dealing in hard cash.

Secondly, considering the present GDP of India, the highest face value of Indian currency should be Rs. 250. In simple words, government should introduce Rs. 250 as the highest-value note because most Indian individuals need the said amount on a daily basis.

On a positive note, people can carry out secure online transactions and NEFTs. They don’t have to suffer losses because of fake currency. NRIs and Forex traders will be benefitted in next couple of months. Folks can invest in stable and reliable forms of investments like Gold ETFs, mutual funds and RDs. This will propel state’s income in the long run.

5. Will the Corrupt Get Punished?

Yes! Piles of money horded by unethical money launderers is reduced to coloured paper. They’ll either have to invest money in more physical assets or deposit Rs. 4,000 on a daily basis in verified bank accounts. Since each bank account is linked to Aadhar cards and verified by PAN card of the individuals, government will be able to pinpoint the exact source of corruption. Thus, the launderers will have to pay huge taxes on their transactions. The turbulence in Indian market will have a mild effect on foreign investments and deposits made in Swiss bank accounts. Nevertheless, with 70% amount in control, it’ll get easier for the authorities to impose control on the rest 30%

Regardless of what the public says, industrialists, bankers and investors welcome this step with open arms. KV Kartik, a reputed associate from Deloitte Forensic India applauds Modi’s firm steps in this direction.

By phasing out Rs. 500 and RS 1000 notes the government has taken the fight against domestic black money to the next level. In the backdrop of other developments such as the Black Money Act, voluntary disclosure scheme and the introduction of Benami Transactions (Prohibition) Bill, this is a significant change, as people will have to provide an ID while exchanging the notes going forward. This way the government will be able to identify undisclosed income and can be considered akin to a forced disclosure scheme”, he says.

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