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In an unprecedented move, Indian Prime Minister Narendra Modi has announced the ban of two of the biggest fiat banknotes in the country.

A surprise televised address by India’s prime minister Modi today has left a nation of over a billion-people bewildered after the country’s elected leader announced that ₹500 and ₹1000 bank notes (approx. $7.50 and $15) will be illegal effective November 9. The two currency denominations are the biggest bank notes issued by the Reserve Bank of India, the country’s central bank.

The move, Modi said, was to tackle corruption, black money (illegally held cash) and terrorism.


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According to Indian media house NDTV, an excerpt of Modi’s address had the Prime Minister stating:

There comes a time in the history of a country’s development when a need is felt for a strong and decisive step. For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development.

 

What This Means

The unexpected move will see the entire Indian population forced to stop by their banks or local post offices to turn in their money as deposits into their bank accounts.

“Your money will remain yours. You need have no worry on this point,” Modi stated, adding that with 50 days (until 30 December 2016) remaining to deposit the defunct bank notes, there was “no need for panic.”

The effective recall of the bank notes is certain to have a significant impact on one of the fastest growing economies in the world. The two denominations, now-defunct, easily represent a significant majority of the value of Indian currency notes in circulation.

As one chart shows:

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Chart courtesy: Atlas

Prime Minister Modi also added that ATMs around the country will not work on November 9 and “in some places” on November 10. To make matters more complicated, ATM withdrawals will be limited to a relatively mere ₹2000 ($30) per day, per ATM card.

Following the announcement on a late Tuesday evening around 8 PM local time, Indian citizens rushed to their nearest bank ATM machines to proactively avoid any scenario of running out of cash during the coming days. Understandably, some Indians are losing sleep, literally, over the decision.

The abrupt and unexpected measure is also certain to make life difficult for millions of India’s poor who are unbanked and face a very real possibility of seeing their lives disrupted in the coming days.

Exemptions include gas stations and pharmacies in government hospitals, railway and airline ticket counters and a few other places will see the now-outlawed bank notes remain legal tender.

The Impact on India’s Economy

The most immediate disruption due to what is arguably one of the largest reforms in Indian financial history is certain to see repercussions beyond dealing a blow to the ‘black money’ economy. Everyday households’ ability to transact and make payments will be impacted due to the freeze on liquidity and a general decrease in circulation of bank notes is likely to adversely impact trade.

The Indian Industry’s Reaction

The banking and the wider industry of India Inc., has weighed in on the move.

Chanda Kochhar, managing director at ICICI, one of the leading private sector Indian banks stated:

It’s perhaps the most significant move ever taken to curtail the parallel economy. It will give a sharp boost to all formal channels of payments which in turn will help the formal economy to grow at a faster clip in the long term.

The move to bring sweeping state-imposed controls over cash will also mean that paperless transactions are bound to increase, according to K V Karthik, a partner at Deloitte India.

From a business perspective, this move may impact small businesses as several such businesses deal in cash. However, this move is likely to lead to a rise in online transactions going forward, propelling the move towards paperless currency.

 

Opining his take on the move, Sathvik Vishwanath, CEO and co-founder of prominent Indian bitcoin exchange Unocoin stated:

The intentions are good, but very difficult to achieve. If going cashless is the only way forward, certainly bitcoin, which is borderless, trustless and a transparent currency makes more sense.

 

As a part of the plan to phase out the existing currency notes, Modi revealed that newer currency notes will be issued to take their place.

Image from Shutterstock.

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