Bank deposits will spike: How Rs 500, Rs 1000 note ban will impact economy

Here is a quick compilation of how leading brokerages and research houses interpret the development

In a bid to clampdown on black money, the government withdrew Rs 500 and Rs 1,000 notes from circulation with immediate effect. Reserve Bank of India (RBI) data suggests that the proportion of Rs 500 and Rs 1000 notes were 86.4% of total value of notes in circulation on March 31, 2016, amounting to Rs 14 trillion. The growth rates in these notes were 76% and 109% respectively in the last five years versus overall currency in circulation going up by 40%, points out a Citigroup note.

Here is a quick compilation of how leading brokerages and research houses interpret the development, and its impact on the economy and sectors.

NOMURA

First, while citizens will be inconvenienced in the short term, this is a big medium-term positive in the government's effort to crack down on black money and corruption. Second, as the old currency notes are deposited with banks, bank deposit growth will witness a pickup and currency in circulation will moderate - a positive for banking sector liquidity. 

Third, as rural households open new bank accounts to deposit old notes, this may also end up giving a boost to the government's financial inclusion thrust. Fourth, since black money played a role in real estate transactions, this crackdown is very likely to hurt the real estate market, which is already reeling under high inventory in top tier cities such as Mumbai and Delhi. Fifth, as some of the black money is brought under legitimate channels, the government's tax revenue collections will get a boost. 

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Room for 25% cut in home prices due to scrapping of Rs 500 and 1000 notes

Coming at a time when property sales have been experiencing a slowdown, the ban of Rs 500 and Rs 1,000 notes could further bring down home prices by 20-25 per cent, say realty consultants and investors Business Standard spoke to. 

“There will be liquidity crunch in property markets because so much cash is going to go out of the system. Till stability comes back, the problem is going to be there,” said Gulam Zia, executive director, Knight Frank, a global property consultant.  Zia says while the national capital region (NCR) market could correct by 20 per cent, in Mumbai it would be 15 per cent and southern markets could see a 10 per cent correction in prices. 

Zia says both primary and secondary markets will be impacted and the pain in NCR, where cash component is high, will spread to other markets. 

“There will be a domino effect. It is foolhardy to believe that primary markets are devoid of cash component. Developers need to pay cash in many places . If they pay in cash, they’ll receive in cash,” he says.  Twenty-five to 33 per cent of the real estatemarket is believed to be cash market. Home sales fell 22 per cent in eight major cities to 33,304 units during the September quarter due to muted end-user demand, according to a report by PropEquity Research. “Housing demand across key cities declined by 22 per cent largely on account of muted end-users demand even when developers continue to offer heavy discounts and benefits,” PropEquity added. New launches also fell by 22 per cent at 22,745 units, from the previous quarter, while unsold stocks declined by three per cent.

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Real estate, luxury goods worst hit: Check out the winners and losers from demonetisation

Excerpts from a Deloitte report on the winners and losers from the government's bold move

n one of its most significant moves since assuming power, the Narendra Modi – led government demonetised Rs 500 and Rs 1,000 notes in a bid to curb black money circulation in the economy. 

According to reports, the proportion of Rs 500 and Rs 1000 notes were 86.4% of total value of notes in circulation on March 31, 2016, amounting to Rs 14 trillion. The growth rates in these notes were 76% and 109% respectively in the last five years versus overall currency in circulation going up by 40%.

Also Read: Govt talks tough, to track cash deposits closely

Though the Rs 500 and the Rs 1000 note ban has inconvenienced the aam aadmi, experts say, the move will have far reaching implications for the Indian economy in the long-run. 

Here is an excerpts from a report by Anis Chakravarty, lead economist at Deloitte, on the winners and losers from the government’s bold move.

SHORT-TERM IMPACT

There will be a disruption in the current liquidity situation as households are likely to get affected by the note exchange terms laid by the government. Though clarity is unfolding, commodity transactions and general cash market transactions are likely to feel an immediate impact. 

Also Read: Tax plus 200% penalty on deposits if income mismatch: Hasmukh Adhia

Unorganised sector proceedings including small trade market activities will remain volatile in the short-term. Roadside vendors, cab drivers, kirana stores etc have already stopped accepting Rs 500 and Rs 1000 notes. It is important to note that a significant percentage of the Indian workforce is employed in this sector which is likely to be affected by immediate liquidity issues. 

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Going to currency exchanges with old notes? The taxmen are watching you

The government has appealed to people to not indulge in such kind of money exchange

The income tax department is tracking operations of money changers known to convert large amounts of unaccounted cash.

With the government banning Rs 500 and Rs 1,000 notes from Tuesday night, people with black money are trying to have their existing currency notes converted into new ones through money changers. 

A tax official said these operators charged a 10-15% fee for exchanging the old notes using multiple bank accounts. 

Some money changers operating just behind the Reserve Bank of India (RBI) building in Mumbai’s Fort area said they would charge a 15% fee to convert Rs 1 crore by Thursday afternoon. Asked how they would receive their new currency notes, they said they had their own arrangements. 

“Several currency suppliers are hand-in-glove with bullion traders while others deal with bank officials,” the tax official explained. In some cases, these were chartered accountants who laundered money for their clients, he added.

The government has allowed people to exchange old notes at banks and post offices till December 30. The daily limit is Rs 4,000 between November 10 and November 24 and it will be raised thereafter.  

Wrong Money Exchange Practices

Black money: Modi govt's move to bring in new notes explained in 8 graphics

In a surprise move aimed at clamping down on black money as well as counterfeit notes in circulation, Prime Minister Narendra Modi on Tuesday announced that currency notes of Rs 500and Rs 1,000 denomination that are currently in circulation will no longer be legal money and cannot be used as medium of exchange from Tuesday midnight. 

In place of the now discontinued currency notes, the Reserve Bank of India will issue new Rs 500and Rs 2,000 currency notes.

Here is how the Modi government has explained the move in 8 graphics:

See all 8 graphics here

In Zaveri Bazar and Chandni chowk, you can exchange Rs 1,000 for Rs 600

The businessman would deposit money with the banker and then take back 80% of the money after some time with the balance 20% remaining with the banker as a facilitation fee.

While the country is still grappling with this new problem of Rs 1000 and Rs 500 notes being banned, the really resourceful and imaginative businessmen have already planned their moves. Bankers in the Fort area of Mumbai, India’s financial capital, have confirmed receiving calls for converting old currency with new one in due course, with a nice cut for them thrown in.

 In the calls made to the bankers, a flat twenty per cent cut was offered to a banker who did not wish to be named for getting the notes exchanged in due course. 

The modus operandi: The businessman would deposit money with the banker and then take back 80% of the money after some time with the balance 20% remaining with the banker as a facilitation fee.

Though, Rs 1,000 notes have ceased to be legal tender, enterprising businessmen in Mumbai’s Zaveri Bazar and Delhi’s Kucha Mahajani at Chandni Chowk are offering to exchange these notes with Rs  500 to Rs 600 in return. The balance would remain as the cut for these “service providers”.

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Demonitisation: In the works for 6 months, 10 people in the loop, including Raghuram Rajan

Banks were told they would be receiving the new banknotes, but none - not even the powerful heads of the biggest state-owned and private banks - were aware of the decision to demonetise the older bank

On Tuesday, even before Prime Minister Narendra Modi’s address to the nation was being telecast across television channels, the Reserve Bank of India (RBI) had already started dispatching the new series of Rs 500 and Rs 2,000 notes to banks across the country.

Banks were told they would be receiving the new banknotes, but none — not even the powerful heads of the biggest state-owned and private banks — were aware of the decision to demonetise the older banknotes of Rs 500 and Rs 1,000 denominations. Until they heard it on TV, that is.

The landmark decision by the government to put the notes out of circulation was a process six months in the making, and involved a lot of challenges, the biggest being keeping it confidential, sources involved with the exercise toldBusiness Standard.

In fact, only 10 people in the system were aware of the plan in its entirety. The proposal gained traction in a meeting between officials of the Prime Minister’s Office (PMO) and the finance ministry and the logistical process was set in motion after Modi gave his go-ahead in early-May. The thenRBI Governor Raghuram Rajan was also on board.

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