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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200% penalty for income mismatch, banks open on Sunday: What you should know about demonitisation

Mismatch between deposited sum and income declared would attract up to 30% income tax and 200% of tax liability as penalty

The government is closely tracking all cash deposits into banks and has warned that deposits above Rs 2.5 lakh threshold under the 50-day window could attract tax plus a 200 percent penalty in case of income mismatch.

Here is everything you should know

1. 200% penalty The finance ministry on Wednesday warned that any mismatch between the deposited sum and income declared would attract up to 30 per cent income tax and 200 per cent of tax liability as penalty.

The (tax) department would do matching of this with income returns filed by the depositors. And suitable action may follow.

Any mismatch with income declared by the account holder will be treated as a case of tax evasion. However, Revenue secretary Hashmukh Adhia said small businessmen, housewives, artisans and workers who had some cash lying as their savings at home should not be worried about any tax department scrutiny.

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Complete chaos: ATMs dry out, tollgates and train counters refuse to accept Rs 500 notes

Small and Medium enterprises, including the wholesale markets in Tamil Nadu have been hit due to the Government's decision to withdraw Rs 500 and Rs 1000 notes from circulation. Meanwhile, ATMs in most part of Tamil Nadu dried out on Tuesdaye night and fights broke out at tollgates and petrol pumps. 

Travellers suffered as their notes were turned down in railway counters and hotels. For example, people who are travelling from Coimbatore to Jollerpatai have to pay Rs 115 for their tickets but those who went to the counters with Rs 500 notes were turned down despite government's assurance that citizens can exchange Rs 500 and Rs 1,000 notes at train stations. 

In tollgates located at the highways, people were seen getting into fights after they were refused change for Rs 500 and Rs 1000.

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What about my vegetables and fruits? Purchasing daily goods biggest problem for aam aadmi

Vegetable vendors, pharmacy shops, grocers all deal in cash and in panic refused to accept Rs 500 and Rs 1,000 currency

Early Wednesday morning the biggest concern for the common man was purchase of fresh fruits and vegetables along with everyday grocery items as vendors across the country refused to accept Rs 1,000 and Rs 500 notes after the government rendered the two denomination notes as invalid.

Most of the people did not have many  notes of Rs 100 denomination, which made them rush to the ATMs. 

Vegetable vendors, pharmacy shops, grocers refused to accept Rs 500 and Rs 1,000 currency on Wednesday. This has become a major problem for the people to manage their daily expenses. Panic-stricken citizens across cities rushed to ATMs,  as word spread that the Rs 1,000 and Rs 500 notes in their wallets may not be accepted by shopkeepers anymore.

Even though neighbourhood corner stores were not part of the government list to accept the demonetised currency, many loyal shoppers were spotted racing to grocery shops to stock up their kitchens.

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I-T Dept to keep record of deposits over Rs 2 lakh

With demonetisation of Rs 500 and Rs 1,000 currency notes, the government has directed Income-Tax Department to coordinate with all banks and furnish details of individuals who exchange cash amount of Rs 2 lakh and above.

“A key reason for scrapping these two currency denominations is to curb the huge menace of fake currency, tackle black money and make India a cashless economy,” said a senior I-T department official.

The object was also to make Indians tax complaint, which will eventually lead to higher revenues for government, he added.

The tax department has been asked to keep record of every individual along with his/her PAN card details and tally it with the tax filing. Accordingly, the department will impose penalty, which could be between 30 per cent and 120 per cent, depending on the source of income.

India has physical cash circulation of Rs 17 lakh crore, of which 88 per cent is Rs 500 and Rs 1,000 notes. Official data suggest that 40 per cent of black money is generated in real estate, while stock market and bullion transactions are other big sources.

Estimated total value of gold in India at 25,000 tonnes is Rs 70 lakh crore. India imports 750-1,000 tonnes of gold every year.

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Rs 4,000 a day not enough! How do I change my old currency? RBI answers

All banks would be shut for public on Wednesday. ATMs too would not function on Wednesday and in some areas even on Thursday.

There was panic at  ATMs across the country as Prime Minister Narendra Modi surprised the nation by declaring that Rs 500 and Rs 1,000 notes will not be legal tender from midnight Tuesday, in a new war on black money and terrorism.

In order to prevent people from panicing, the RBI has released FAQs on the same.

1. Why is this scheme introduced?

The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced.

2. What is this scheme?

The legal tender character of the existing bank notes in denominations of ?500 and ?1000 issued by the Reserve bank of India till November 8, 2016 (hereinafter referred to as Specified Bank Notes) stands withdrawn. In consequence thereof these Bank Notes cannot be used for transacting business and/or store of value for future usage. These Bank Notes can be exchanged for value at any of the 19 offices of the Reserve Bank of India or at any of the bank branches or at any Head Post Office or Sub-Post Office.

3. How much value will I get?

You will get value for the entire volume of notes tendered at the bank branches / RBI offices.

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You have 50 days to deposit your notes: Full text of Modi's black money speech

My dear citizens 

I hope you ended the festive season of Diwali with joy and new hope. Today, I will be speaking to you about some critical issues and important decisions. Today I want to make a special request to all of you. You may recall the economic situation in May 2014 when you entrusted us with an onerous responsibility. In the context of BRICS, it was being said that the “I” in BRICS was shaky. Since then, we had two years of severe drought. Yet, in the last two and a half years with the support of 125 crore Indians, India has become the “bright spot” in the global economy. It is not just we who are saying this; it is being stated by the International Monetary Fund and the World Bank. 

In this effort for development, our motto has been ‘Sab Ka Saath Sab Ka Vikas’: We are with all citizens and for development of all citizens. This Government is dedicated to the poor. It will remain dedicated to them. In our fight against poverty, our main thrust has been to empower the poor, and make them active participants in the benefits of economic progress.

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Scrapping of Rs 500, Rs 1,000 notes: What leaders are saying

As the Centre scraps Rs 500 and Rs 1,000 notes, various business and political leaders are reacting to it. Following are some of the reactions:

Good initiative, implementation painful: V Balakrishnan, former CFO of Infosys

"It is a good initiative to reduce black money. But we need to see implementation has to be seen because the transition can be painful. However, the first thing they should do to remove all the black money is to have political parties receive donations only in cheque. Today, 75-80% of political donations happens by cash. That is the starting point for black money. I think if they had done that too. It would have brought  a lot of credibility to the whole process," said Venkatraman Balakrishnan, who is also a partner of Exfinity Ventures says to Business Standard.

Vikram Kirloskar, Vice Chairman of Toyota Kirloskar Motor Pvt Ltd

He tells Business Standard, "I think it is a good move. Looks like the prime minister has planned it is for sometime. One basic thing, when people talk of a business of the third world, second world or first world. It is not the size of the economy, but how we run the economy and the value and ethics we adopt. Mr Modi has talked about Swacch Bharat that includes reducing corruption,  making ease of business and how to improve the positioning of the country. If we fight corruption, it helps us hold our head high."

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To Curb Flow Of Black Money, Govt Scraps Rs 500 And Rs 1,000 Currency Notes

As part of his government's fight against black money, Prime Minister Narendra Modi on Tuesday announced thatRs 500 and Rs 1,000 currency notes would no longer be printed. 
For the next 50 days, up until 30 December 2016, you could deposit your old currency notes of Rs 500 and Rs 1,000 denominations in post offices and banks. You would need to carry your Aadhaar card and PAN card for exchange of these notes.

The move was aimed to clamp down on rampant corruption, Modi said.

After the said date, the currency notes of Rs 1,000 and Rs 500 would be only paper, with no value, said the PM in his address to the nation. They would cease to be legal tender from the midnight of November 9.

There would be no change in any other form of currency exchange, whether cheque, demand draft or payment via credit and debit cards etc, said Modi.

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