EFFECTS OF DEMONETIZATION OF CURRENCY

AFTER EFFECTS OF DEMONETIZATION OF CURRENCY: The Indian Economy as a whole has reacted sharply to the recent demonetization decision of Government to withdraw Rs.1,000 and 500 currency notes from the market. Some of the points which are of much importance are being emphasised here:

A) WINDFALL GAIN FOR RBI: Demonetization will bring windfall gains to Reserve Bank of

India (RBI) as it will reduce RBI’s liabilities, to the extent that the old notes do not come back into the system. RBI could gain as much as Rs.6 lakh crores, assuming that even less than half of the notes valued at Rs.15 lakh crores do not get re-deposited in the banking system.

B) RBI WAIVES CHARGES ON ATM TRANSACTIONS: The Reserve Bank of India has instructed all banks to waive ATM transaction charges (both financial and non-financial charges). This waiver will be effective till 30th December, 2016,subject to further review.

C) REDUCTION IN INTEREST RATES FOR BOTH DEPOSITS AND LOANS: Because of currency demonetization all the banks will be flush with huge liquidity and this will force them to reduce interest rates for both deposits and advances (loans). This has been already implemented by some banks, as SBI has brought down its bulk deposit rate to 6.95%, Axis Bank has reduced its Marginal cost of lending rate ( MCLR) by 20 basis points.

D) BANK LOAN – DISBURSAL AND REPAYMENTS TO TAKE A HIT: Demonetization will hit the business of banks in the third quarter of the fiscal. The impact is due to both the internal and external factors. Internally, banks are unable to start their normal business operations such as processing of loans.They are unable to keep a watch on their recovery aspects as well. Externally, due to the slowdown in the business many borrowers will not be in a position to repay their loans in time.

E) PENALTY LIKELY ON UNEXPLAINED HIGH DEPOSITS EVEN BEFORE FILING IT RETURNS: The I-T Department may slap a hefty 200% penalty on unexplained high cash deposits in banks even before annual income tax returns are filed so as to prevent black money being converted to white. It is also collecting data on spurt in deposits in zero-balance Jan-Dhan accounts and will slap 200% penalty on unexplained high value cash deposits.

F) YOU CAN WITHDRAW MONEY NOW AT PETROL PUMPS: With as many as 50% ATMs’ across the country not operationalized yet, the government has permitted the state run petrol stations to disburse cash by swiping your debit card. This is done to normalise the panic situation in the country. Presently around 2,500 Petrol stations where State Bank of India swipe machines are used are enabled with this facility and within two-three days around 20,000 more petrol stations will be enabled where swipe machines of HDFC Bank, ICICI bank and Citibank are being used. One can withdraw Rs.2,000/- per day at these petrol stations by swiping his/her debit card.

G) SHORT TERM DEFLATIONARY TREND IN THE ECONOMY: Initially the economy as a whole will suffer adversely as most of the trade/industry will be slowed down. This is because of the diminishing trend in the currency circulation, there by lack of purchasing power with the general public. But this deflationary trend is temporary and will only last for a few months. Once the money circulation becomes normal the trade and industry will pick up.