Prime Minister Narendra Modi announced that 500 and 1000 rupee notes would no longer be valid currency from this month. The remainder of notes still in circulation are to be handed in to institutions by the end of the year he stated in an unscheduled address.
Mayhem ensued as people queued up at ATMs after the announcement.
The move by Modi, who is almost half way through his term of office, is a bid to make good on his election promise of combatting tax fraud and recouping back money (illegal funds) hidden abroad. Modi’s drastic and unexpected step echoes steps taken by the ECB which has chosen to discontinue 500 Euro notes in order to prevent their continued use in illegal operations.
Analysts at JSW Corporation say Indian banks are set to see an increase in deposits, enhancing liquidity in the financial sector even as banknotes in circulation decrease. Depending on how that liquidity is utilised, there could be an effect on short term growth and inflation.
"This is a short-term risk for the economy which we would be tracking closely," said analysts at Citigroup, Inc..
The Indian premier won the confidence of 1.3 billion Indians in the 2014 election by vowing to recoup illegal money hidden abroad and to redistribute the recovered funds amongst the impoverished population. A one off opportunity to declare funds last year led to the legitimization of approximately 25 billion rupees in tax.
According to the governor of the central bank, Deputy Governor R. Gandhi, there are approximately 16.5 billion rupee worth of 500 rupee notes and a further 6.7 billion rupees of 1000 rupee notes currently in circulation.
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