[Nav-i-gator]

The traders and shopkeepers who were saying that this diwali the business was not good (for many reasons), would now have to bite the bullet and bring out all the money to the banks. I will not be surprised if the sales accounting from small businesses reflect a huge surge - reporting it to diwali festive season (can't hide cash now).

As for the corrupt babus, govt officials (civil engineers, excise inspectors, police) etc, they are doomed. All that cash stashed under the bed is now of no use. can't use, can't report, can't deposit.

[nowwhat?]

What an interesting night! First this announcement and now The Donald is President.

I spoke to a few people this morning. One is an informal moneylender who never declared any income and hardly used his bank account, he suddenly feels poor and is looking for others to convert his cash except that no one, not even the poor people he lends money to want to do it and he knows that time is running out. His only solace is that he hasn't lost it all as he hopes to get back the money he lent.

Another is a corrupt retired government official who kept his ill-gotten gains in various cubbyholes at his house. He is fortunate that he spent a lot of his ill-gotten gains into buying real estate, constructing flats and giving them out to rent, but he still has a lot of cash that is suddenly worthless.

In both cases, they got to keep some of what they have, but their lifestyle I suspect is now seriously cramped.

Originally Posted by sbala

Very brave and bold move by our PM.

One thing i dont understand is the introduction of Rs. 2000 denomination. Is it really needed? Can we not survive with denominations till 500?

I have a strong belief that one day all transactions above a certain limit (> 2000) will have to be done through cards.

Yes, a cashless society is something RBI has been trying to aspire for. Major impediment was dearth of bank accounts by the rural poor, which has been corrected to some extent. Jan Dhan Yojana and Direct Benefit Transfer has ensured opening of new bank accounts. But RBI has not promoted RuPay as well as it should have, it should drive the owning PSU banks to get RuPay accepted everywhere in lieu of cash.

Serial numbers of ₹2000 notes are to be tracked at multiple points of entry such as banks and maybe other places. On 27th October, RBI issued a directive that no currency note greater than ₹100 can be recirculated without processing. At any point in time, RBI can choke the circulation of ₹2000 notes. I suspect ₹2000 was introduced to temporarily stem some of the backlash.

On May 5 under Currency Distribution and Exchange Scheme, RBI announced to banks that it will fund of up to 50% on ATM machines that dispense notes up to ₹100. This gives us some direction that ₹100 is the one to stay.

Originally Posted by Chetan_Rao

Random thought, but wouldn't limiting circulation of higher-denomination notes, both by volume and validity (expiring current notes anyone?) be a much more practical long-term solution?

Currency with a fixed expiry would automatically limit the duration it can be kept out of circulation/reporting, or so one would think.

It was only in January 2014 that RBI tested its ability to take certain currency notes out of circulation, it did that with the pre-2005 notes which had limited security features. Now we can be sure that RBI will do this regularly. To some extent it will be without anyone of us even knowing as it will be done by banks.

Simply removing some notes from circulation will however not get rid of black/dirty money since you always need to introduce an amnesty scheme to exchange the currency notes. In the past, those with black money simply exchanged their old notes for new ones as they had a long time from announcement to actual implementation (December 2014) and even then they had almost a year (until December 2015) when anyone with minimal ID proof could go to a branch and exchange the notes.

Originally Posted by Sawyer

Something I don't understand.

Traders are not doing any cash business today, because they don't want to accept Rs 500 notes. Why are they losing business even for the time it takes us to get new money or smaller denominations? After all, they can deposit the money in the bank for quite some time yet, and while they may not have been paying all the income tax due, I find it hard to believe that they were paying no income tax all.

There are a number of small businesses I know whose owners deposit cash into their current account regularly and report their income every year. Those who have been under-reporting income for years will be feeling the heat with the pile of cash they already have, so they definitely don't want any more of these notes.

[bbhavan]

Great move to tackle a menacing issue of black money.

From 2004 to 2016 , about 94 Lakh crore black money came to India. When we print 1 lakh rupees in the govt. press, about equal amount is getting printed illegally in one of our prominent neighbouring country. It is being circulated to India through other neighbouring countries.Each year, about 50,000 cr. is being circulated only for exporting terrorism.Other black money is being used by land mafia, real estate mafia,gold mafia and others.

The un accounted assets like gold, and real estate may not be retrieved, but at least the generation of new assets will be blocked by these welcome measures!

[Samurai]

Originally Posted by harshunlimited

However, I feel, if this would ve been done in combination with the recently concluded IDS amnesty scheme, I think the government would have earned a lot more in taxes.
People would have instantly flocked to the IT's office, submit there black money 45% tax & become compliant.

Not really. If people don't declare the money now, it is same as giving the entire amount to the government. Don't you see? After the deadline, government can account all the missing currency as taken back, it doesn't matter whether government burns it or the people burn it.

Originally Posted by comfortablynumb

Not only traders. I have a doc's appointment today, and I got a call from the clinic saying please bring change or your cheque book, as we are not accepting 500/1000 notes now

Panic reaction because Modi said it is not legal tender. As long as banks accept it, there is no real issue.

Originally Posted by Chetan_Rao

Currency with a fixed expiry would automatically limit the duration it can be kept out of circulation/reporting, or so one would think.

Makes it very complicated. One can't check the expiry date of every bill while transacting. What are illiterates supposed to do?

Originally Posted by Sawyer

and while they may not have been paying all the income tax due, I find it hard to believe that they were paying no income tax all.

There are such people who fly entirely under the radar in smaller towns. These are people who do business with other black moneyed people, so they can't give/keep receipts. If they report income/purchase, the government will go after their customers/vendors. For example, once sales tax department raided us after we built our office. After checking our records and finding it proper, they went through all the purchase invoices and then hunted down our suppliers, most of whom had never paid tax in their life.

Originally Posted by Sawyer

No, the civilian Weimar government did this, and created the environment that got Hitler elected, which led to the military government.

My bad, I didn't remember who was in charge. But surely it was not somebody who understood monetary policy.

Originally Posted by Sawyer

and that the government has guaranteed it isn't the primary reason for this belief.

What else could be the primary reason. Fiat currency comes to life only due to government guarantee. Next, the government has to ensure the value is stable.

What makes people dump a currency is volatility. If they move to bartering or foreign currencies, it is because they don't believe that currency retains its value in the short term, that is between transactions. That is the only true function of a currency bill, to hold its value in the short term.

Interest rates are another way of looking at it. If the interest rates very low, people don't mind borrowing money on a long term basis because it holds its value. If the interest rates are high, that money is losing its value fast. You will need very high yielding investment to invest such cash.

Some people talk about how dollar used to be 30 rupees in the 90s, and 70 rupees now. They think that is the proof of lose of value. No, dollar value of rupee is just a number. What matters is the short term volatility. If I make a deal to sell an item to a foreign customer at $1000 (at $=₹70) and then rupee strengthens ($=₹65) before I get payment, I am at a loss. Then I might keep the payment in $ because I am afraid of ₹ volatility. However, the gradual fall over decades doesn't matter.

[sukhoi30]

My comments first ... This is a FANTASTIC move. The timing of this announcement is too good to be true.


Tons of black money is involved in US elections betting and the First India - England cricket betting. People involved in these illegal betting will be the losers.

Terrorists/anti-social elements and their funding partners are the next big losers. They will have no clue what they will do with the old currency now. For national security this is a very good move.

Then there are all those real estate barons who walk around with wads of notes. They will definitely be having heart attacks. I have a few friends in that segment and I have never seen them use credit or debit cards. In fact, some used to laugh at me when I use cards as according to them real money is cash.

This eliminates fake notes in one shot. I have got so many fake Rs. 500/1000 notes, even through ATM, in the past couple of years. I used to dispose them at toll booths with some guilt, but what else could I do!

Its a huge huge decision and I should say it was well planned. Such a kick is definitely needed to prop up the economy and clean up the monetary system.

In the auto sector, I think it will affect only the luxury brands where large cash transactions happen.

Originally Posted by sbala

Very brave and bold move by our PM.

One thing i dont understand is the introduction of Rs. 2000 denomination. Is it really needed? Can we not survive with denominations till 500?

I think every country will have to supplement or at least equalize the money that is digital with hard currency. In case of any crisis, people should be able to have hard currency. Hence Rs.2000 denomination makes sense. however, as per the PMs address, the distribution of this denomination could be limited and controlled. Also, they are going to come with additional security features. (Ignore some messages in social media about nano-chip for tracking etc ... that is a hoax). I doubt if you will ever see Rs. 2000 denomination notes coming out of ordinary ATMs.
If you have seen RBI press conference yesterday, they do suggest that even new Rs. 100 / Rs. 50 / Rs. 20 / Rs. 10 notes will be introduced with better security features in the future.

Originally Posted by harshunlimited

Well! too good a move.
However, I feel, if this would ve been done in combination with the recently concluded IDS amnesty scheme, I think the government would have earned a lot more in taxes.
People would have instantly flocked to the IT's office, submit there black money 45% tax & become compliant.

Nope. The amnesty scheme was different. It was a way for people to come out and declare their undeclared assets/money. Though they had to pay some fine, but bulk of the money they could retain. I don't think people would have flocked to banks with bags of cash and declared them. They would have instead gone to some jewelers and disposed off the cash. Because the Govt. didn't give the time, none of the dishonest people are able to dispose off their ill gotten money.

Originally Posted by naut

Vikram,

Eventually money printing will return to full swing. Is my understanding wrong?

Well, there is a process to printing money. RBI does not print money just to put notes into the market. There are various factors like inflation, treasury bonds, bank balances etc. The Rs. 2000 notes will eventually come to market but will probably be controlled.

[daretodream]

Folks in Bangalore
Have you tried using old currency at petrol pumps today?
Any luck?

[Zappo]

The way I read it is a little different. First of all, this is definitely a very bold move and takes someone with a clear conscience and at the same time a strong shoulder to take such decisions. For example Mr.Singh too was a scrupulously clean politician in his own personal rights. However, irrespective of all his posturing against the black money he could never take a decision of this proportion as this brings huge amount of pressure from every quarter considering the number of heavyweights that get affected.

Now is this really a panacea? I do not think so. Unless, they strengthen the system as a whole we will be back with the same problems within 6 months at most. This will only provide a temporary relief. Will mop up some sizable amount in taxes and other levies as every transaction for a short duration will have to go through the official route. To some extent it is also a bold gamble just before the UP elections which can go either ways depending on how the dice rolls.

However, on the long term they need to stop printing currency notes beyond Rs.100 This also has a long term effect on the inflationary trends besides making it difficult for the currency hoarders and those in the business of FICNs. Also, most people in the black money business convert these into other forms like gold and benami properties. The institutions need to be strengthened so that any dealings in such avenues can't easily be done outside the loop.

Otherwise, this is the 4th time India has demonetized its currency notes since independence.

[sukhoi30]

Originally Posted by Nav-i-gator

As for the corrupt babus, govt officials (civil engineers, excise inspectors, police) etc, they are doomed. All that cash stashed under the bed is now of no use. can't use, can't report, can't deposit.

To look at it philosophically, this is the time for such people to redeem themselves from the ill-gotten wealth and lifestyle. They should get back to doing what they are employed to do and do it honestly and fairly.

[Nav-i-gator]

Originally Posted by sukhoi30

To look at it philosophically, this is the time for such people to redeem themselves from the ill-gotten wealth and lifestyle. They should get back to doing what they are employed to do and do it honestly and fairly.

And perhaps distribute the 500 and 1000 rupee notes to poor people who can then go to bank and deposit it in their jan dhan account. A bit of penance when karma catches up...

[Mnjdnght]

Originally Posted by daretodream

Folks in Bangalore
Have you tried using old currency at petrol pumps today?
Any luck?

I filled petrol today and paid in 500 Re notes. No problems except the long queue and chaos at the bunk.

[Sawyer]

Originally Posted by Samurai

What else could be the primary reason. Fiat currency comes to life only due to government guarantee.

I would argue that it is the belief in the government's guarantee that gives it life. The more credible the government and its policies, the more credible the guarantee, which is why given a legitimate choice I would rather hold USD than INR, but I would prefer INR to currencies of many African or Asian countries.

As good as any explanation I have read on the magic of money:

"During one of the first classes in economics, a professor will take a dollar bill out of his wallet and hold it up for the class. He asks his students, "What is this?" Of course most will shout. "One dollar." The prof will say, "Yes, but what else is it?" Replies will include: legal currency; basis of our economy; and piece of paper. Then he will state, "All your responses are true, but what it really is....is a belief system. People believe that this piece of paper with printing on it has a specific value. That value is established in the minds of people, not by physical measure. It is an abstract idea, not a concrete material thing." Most students will from that point on, realize how ephemeral the value of money actually is.

Money is like Tinker Bell in the final scene of the play, Peter Pan. If people do not believe, it will fade away. But, of course, people do want to believe and the spot-light on Tinker Bell brightens with the loud cheering of the audience. "

As to the chaos at the petrol bunks - more irrational panic! And now the bunks will run dry because of this behaviour.

[vivek95]

First things first, yet another terrific bold move by our dear PM ! Hats off !

Guys, was just thinking what's the situation in temples across India right now following this demonetization move ?? Donations might have shot up right away since yesterday night, no ? Its possible that some hoarders of black money might have put bundles of 500/1000 notes into the donation boxes, well as a means of "penance"

[Queryanalyzer]

Originally Posted by Sawyer

Something I don't understand.

Traders are not doing any cash business today, because they don't want to accept Rs 500 notes. Why are they losing business even for the time it takes us to get new money or smaller denominations? After all, they can deposit the money in the bank for quite some time yet, and while they may not have been paying all the income tax due, I find it hard to believe that they were paying no income tax all.

Its just fear and misunderstanding. They fear that Rs.500 currency is worthless and this fear is spreading like wildfire. The fact that these notes can be deposited/exchanged is conveniently forgotten in this frenzy.

[nshankar]

A very bold move, but appears well planned.

All black money held in the country in cash is wiped out! All high denomination counterfeit notes also wiped out.

The future should be cashless transactions from individual's accounts except for petty cash transactions. This way the tax burden on tax paying individuals can be eased as more people will fall into the tax bracket.

[SS-Traveller]

Originally Posted by benbsb29

...I had some money saved up in cash for emergency use for taxis, etc when i visit India. Thanks for making that hard-earned tax-paid money worthless.

Originally Posted by prasadee

I consider the Rs1000 notes I have with me as a donation to the cause of black money eradication .

FYI: http://www.sbs.com.au/yourlanguage/h...00-rupee-notes