November 08,2016 emerged as a historic day for India when the Prime Minister Mr. Narendra Modi made one of the greatest changes in the monetary policy of the country by demonetizing the 500 and 1000 rupee notes. This decision was taken to root out the menace of black money and corruption.
Reserve Bank of India (RBI) data suggested 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.
THE IMPACT ON OUR ECONOMY:
This move set off a knee jerk reaction, especially in real estate and infrastructure stocks, many of which saw double-digit cuts. Developers will initially run into a liquidity squeeze, as real estate prices are expected to fall in response to the PM’s demonetization move. The economy can even experience some deflationary tendencies or lower real demand (economic activity).
The jewelry sales have soared sky high and will remain high for a couple of weeks/months. The sales of luxury stores will take a hit.
But it is a positive move for the economy as a whole and the financial markets in general. In the long run, banks will benefit most from this decision as the rotation of black money will reduce and more people will start availing banking services. Housing finance and construction companies will also benefit as housing is likely to become more affordable," said Rohit Gadia, Founder & CEO, CapitalVia Global Research.
Most analysts expect cement demand to take a hit, as 70 per cent of cement is consumed by the housing sector. Also, banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. The impacts could be different from sector to sector – deflationary for some and contrasting for others. This is a short-term risk for the economy.
We hope that this historic step becomes successful and the common people need not suffer much because of this. Please share your views in the comments section below.