Demonetisation of the Indian Rupee 101

What does demonetisation mean?

Demonetisation is the act of stripping a currency unit of its status as legal tender. On November 8, 2016, the Prime Minister of India, Narendra Modi announced that all Rs. 500 (approx $7.50) and Rs 1000 ($15) bills would be considered invalid (combined an approximately 86% of notes in circulation) as of midnight the following day (November 9, 2016). These would be replaced by new Rs 500 and Rs 2000 bills.

This has been done before in India – in 1946, all 1,000 and 10,000 rupee notes were made void and again in 1978, 1,000, 5,000, and 10,000 rupee notes were demonetised.  

Old Rs 500 and Rs 1000 bills

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New Rs 500 and Rs 2000 bills


 

What was the reason for demonetisation?

The government claimed that the demonetisation was an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crackdown on black money in the country. The move was also described as an effort to reduce corruption, the use of drugs, and smuggling.
 

What can one do if they possess the old invalid notes?

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Individuals were able to exchange the old notes for new ones at a bank branch by filling a requisite form along with ID proof – this however, was abruptly ceased on 25 November 2016. It was observed that over the counter exchange of the old currency notes of Rs500 and Rs1,000 denomination has shown a declining trend. Citizens will have until 30 December 2016 to tender the old notes for the required credit into their bank accounts. Individuals can no longer exchange the old notes after 30 December 2016 as the government has no plan to extend the deadline.
 

What has the effect been in India so far?

Most of the Indian rural areas are powered by cash transactions and few people have a bank account or use it even if they have one. Farmers and villagers are now struggling to pay basic goods like food and fuel with demonetisation.

Hundreds of thousand of Nepalese citizens work in India as migrant workers have been left hanging by India’s demonetization decision as foreign citizens are not able to exchange or deposit their notes by the December 30th deadline set by New Delhi’s transition plan.

Illegal money changers in India are currently accepting crisp Rs 500 and Rs 1000 and paying half of its price for smaller denominations.

The stock market indices crashed to near a half-year low the following week after the demonetization.

For Indian students going to study in the US, visa approvals require the proof of availability of funds for the total expenses of the first year which range from 30000 USD to 70000 USD. The deadlines of most institutions range from November to February create further time pressure. In this context, the demonetization will be likely to affect the possibility for the Indian students to study abroad.

The Indian banks are increasingly collaborating with fintech startups in the country to develop banking solutions. “It has been said that banks consider fintech startups to be competitors and disruptors. But through a partnership like this, the bank gets access to new customer segments and innovative products, while it gives us access to the balance sheet and the experience that a bank such as IDFC has.” Sashank Rishyasringa — cofounder of an alternative lending startup Capital Float said.The government’s demonetization move has also increased interest in Bitcoin among Indians.
 

What do I do if I am visiting India in the near future?

Given the suddenness and scale of the move, there is a massive supply crunch of the new Rs 500 & Rs 2000 notes. Visitors should be careful they are not given the old notes as they are worthless currently. Sub Rs 500 denomination old notes are still legal tender. Holders of the old notes currently who are non Indian citizens, will not be able to exchange their existing currency for new ones unless they can find friends who are citizens or take a certain haircut and avail the services of certain companies who will do the needful.

If you still have a question, you may approach the control room of RBI by email (publicquery@rbi.org.in) or on Telephone Nos 022 22602201/022 22602944.

 

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