Demonetisation of Rs.500 and Rs.1000 notes: How will it affect the Indian market?

In a bid to launch a relentless attack on black money hoarders in India, Prime Minister Narendra Modi said in his national address on Tuesday evening that Rs.500 and Rs.1000 notes would cease to be legal tenders effective Tuesday midnight. This move came just a couple of months after the income disclosure scheme (IDS), which ended on Sep 30, 2016 where the government collected around Rs 65,000 crore. Moreover, this is just the second time post Independence that a government has banned currency notes of high denominations in order to ensure higher tax compliance. Morarji Desai was the last person to do it in the 70s.

 

This surprise move caught Indian citizens unaware as they try to digest this by finding ways to incorporate this news into their daily lives. However, India Inc. welcomed this move of the government and stated that it would have long-term benefits for India.

 

The million-dollar question in everyone’s minds will be the impact this move would have on the Indian market. The government’s decision to demonetise Rs.500 and Rs.1,000 notes could affect the real estate market. The resale property market along with smaller and unorganised real estate players could reel under the impact of this decision. Many industry players feel that housing prices could see a downward trend post this decision. However, according to Rajeev Talwar, CEO, DLF – “We are moving toward a cashless economy, which is a sign of a maturing economy. It is a step in the right direction.

 

General market estimates suggest that around 10-50% of the property value is transacted in cash in India, which leads to black money hoarding, especially in higher currency denominations. Therefore, the demonetisation move will affect the real estate sector in the short term. However, the effect would be much more positive in the long term. This is because people will start becoming more aware about the problems of possessing black money.

 

The jewellery market of India also stands affected by this demonetisation move of the Indian government. However, the impact would be positive as the jewellery industry welcomes this move of the government. Prominent jewellery players feel that the demonetisation move will help create that all-important faith in the precious metal compared with currency notes.

 

Mehul Choksi, CMD, Gitanjali Gems stated that ‘It will create havoc for a little while and the economy will also destabilise. However, overall, it is going to be good for the country. In fact, the jewellery industry will thrive since people will have more trust on jewellery than currency notes’. Moreover, Balram Garg, MD, PC Jewellers, added by stating that ‘This is a very good decision for the long term, especially for the organised sector. There could be impact on pure gold demand, which is good for jewellers.’ Although industry players feel that the move might lead to certain issues for unorganised jewellers, they are confident that it will help them get better organised in terms of funds.

 

Let us hope the decision of the Indian government to demonetise Rs.500 and Rs.1000 notes effective Tuesday midnight will help curb the menace of black money while helping the overall economy.

 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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