Page 44 - Banking Finance December 2016

FEATURES

Impact of Demonetisation on various economic This will reduce the total currency circulation in the
economy - leading to deflation. Deflation increases the
variables
value of money that we have because the total money
Sector Impact supply goes down but the commodities and things avail-

Auto Marginally negative able in the market have not gone down. Gold prices,
stocks & commodities will drop.
Banks and NBFCs Neutral
Steel Marginally negative 2. This will also lead to Inflation (not over-
Retailing Mostly positive night)
Consumer durables Neutral There will be a lot of people who have a lot of cash, le-
Cement Negative gally earned, which they will deposit it in the bank. Now
Jewellery retail Highly negative the bank with more deposits can do more lending.
Real Estate Highly negative Credit (loans) will become easier and interest rates may
come down. More loans given out increases broad
Source: CRISIL
money supply and creates inflation. But this will hap-
pen slowly, not over-night.
India is among the top five countries in terms
Deflation and Inflation will balance out each other in
of illegal financial outflow the future.

($ mn)
History and Background
The sudden move to demonetize Rs 500 and Rs 1,000 currency
notes is not new. Rs 1,000 and higher denomination notes were
first demonetized in January 1946 and again in 1978.

The highest denomination note ever printed by the Reserve
Bank of India was the Rs 10,000 note in 1938 and again in
1954. Although, these notes were demonetized in January
1946 and again in January 1978, according to RBI data. Rs
1,000 and Rs 10,000 bank notes were in circulation prior
to January 1946.

Higher denomination banknotes of Rs 1,000, Rs 5,000 and
Rs 10,000 were reintroduced in 1954 and all of them were
Source: Global Financial Integrity report (December 2015)
demonetized in January 1978. The Rs 1,000 note made a
Impact of Demonetization comeback in November 2000. Rs 500 note came into circu-
lation in October 1987. The move was then justified as at-
Now the question arises as to what would be the impact of
tempt to contain the volume of banknotes in circulation due
the demonetization over the Indian economy.
to inflation.
1. Immediate Impact: Heavy Deflation Bank notes in Ashoka Pillar watermark series in Rs 10 de-
Initially there will be heavy deflation as people who nomination were issued between 1967 and 1992, Rs 20 in
have earned money through illegal means such as smug- 1972 and 1975, Rs 50 in 1975 and 1981 and Rs 100 between
gling, corruption would be afraid to declare the money 1967-1979. In the year 1980, the legend Satyameva Jayate
as they might be prosecuted by Govt/Income Tax Dept - 'truth alone shall prevail' - was incorporated under the
on the legitimacy of their income. national emblem for the first time.

44 | 2016 | DECEMBER | BANKING FINANCE

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