Demonetisation Of High Value currencies .... India

In yet another major reform, the Indian Government has scrapped the legal tender status of Rs. 500/- & Rs. 1000/- denomination notes. Though this unprecedented move may impact economic activities in some pockets in the near term, it will result in huge benefits for the economy and the capital markets over the medium to long term through lower corruption and improved ease of doing business.

	What it does?
	•	Stops terror financing, fake currency circulation and controls corruption
	How?
	•	87% of the cash in circulation is in the form of Rs. 500 & Rs. 1000 notes.
	•	Large part generated through corruption, economic transactions not reported to tax authorities
	•	The scrappage of high-value notes renders the unaccounted cash or black money worthless
	The Short Term pain
	•	Property and gold would be adversely affected by this move, as these are usually considered the store of unaccounted wealth.
	•	Some parts of the economy could witness slowdown in activities due to reduced money supply.
	•	The near term corporate performance and GDP growth could be weak.
	The Long Term gain
	•	Less corruption improves ease of doing business as India ranks 76th among 168 countries.
	•	Banks would benefit with higher deposit growth creating opportunities for lending rate cuts and investment activities to pick-up.
	•	Sucking out liquidity (in this case, black money and fake currency) should help strengthen the Rupee.
	•	The resultant asset price deflation can lead to overall moderation in inflation, which will be positive for the fixed income markets.
	•	Along with GST, this measure will help improve tax / GDP ratio and should ideally help reduce tax rates in the long run or offer greater ammunition to the Government to work on social schemes.
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