Demonetization Effect on Indian Market

Demonetization Effect On Indian Market

The BJP government has made a surgical strike on black money. With the new demonetization policy the liquidity side of the indian market has been affected. About nearly 86% of currency value in circulation was withdrawn without replacing bulk of it. As a result of the withdrawal of Rs 500 and Rs 1000 notes, a huge gap in the currency composition was created as after Rs 100, Rs 2000 was the only denomination.

The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954 and they were demonetized in 1946 and 1978. Demonetization may be creating some trouble for the common people at this particular time but in the long run we think it will be beneficial for the country’s growth.

Lets have a broader look at the effect of this demonetization policy:

  1. Boost in government’s activities:

     The government will get a boost as a lot of money(Legal) will enter the system and we have to wait and see how much money finally remains in the system.

  1. Road to a new Digital India:

    With this new policy people have started going cashless. Paytm and other similar apps are on the rise. Digital India has actually started working with people using such apps. It has reduced the risk and cost of cash handling as soft money is safer than hard money. The banking system will also improve rapidly with this.

  1. Reduced Government Liability:

    The policy will also reduce the government’s liability. Since the notes issued by the government is a liability of the government, this demonetization will reduce this liability. Thus the government will not be liable to the people who have not disclosed their income. We expect that approximately Rs 5 lakh crore may come to the government in the form of extinguished RBI liability, taxes and penalties.

Demonetization Effect On Indian Market

  1. Increase in gold investment:

    The Demand for gold will increase as more and more people will start shifting in gold as an alternative to cash deposit in the bank. It will give rise to deposits through gold monetization scheme. So India will rely less on gold import as gold deposited through the scheme will be used to meet India’s gold demand. This will help in strengthening of Indian economy.

  2. Reduced interest Rates and Inflation:

    It is expected that in the long run the tax and interest rates will go down. The tax avoidance is going to be reduced. There will be scrutiny in the real estate and gold sector. The IT department has been already informed of the excess cash money deposited in the bank accounts within this period. The higher income tax collections arising from better compliance would offer scope to reduce rates over the long term.

  3. Lowered Corruption and Malpractices:

    The corrupt and malpractices will be reduced. Even the money earned with corruption will become useless.

  4. Short term Instability:

    The liquidity shortage caused by demonetisation will be negative across sectors with high level of cash transactions. Real estate, jewellery, retailing, restaurants, logistics, cement and some segments in retail/SME lending space will be facing short term instability.

  5. Drop in real estate prices:

    We expect a drop in the real estate prices. This will also help upper lower and lower middle class people to buy houses within their budget.

 It is expected that there will be long term growth in the country. It is the right time to invest in Mutual Funds to ensure high long term returns. All we can say is that India will be experiencing “Acche Din” soon and in long term it will give a boost to India’s growth. Demonetization as a cleaning exercise may produce several good things in the economy. It will create some unavoidable tension among the people for a certain period of time but will be fruitful for the future. Overall economic activies will be dampened in the short term.The unmeasurable benefits of having more transparency and reduced volume of black money activities can be pointed as long term benefits.

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