INTRODUCTION

DEMONETISATION

The term demonetization is not new to the Indian economy. The highest denomination note
ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954.
But these notes were demonetized in January 1946 and again in January 1978, according to
RBI data.
On the 8th of November, 2016 when the sun had descended below the horizon and the light
of day had completely faded, when people were returning back home from a long day at
work, a misty light of a new economy was brewing over the country. All 500 and 1000
banknotes of the Mahatma Gandhi Series ceased to be legal tender in India from 9
November 2016.
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 crack down on black
money in the country. The move was described as an effort to reduce corruption, the use of
drugs, and smuggling. However, in the days following the demonetisation, banks and ATMs
across the country faced severe cash shortages. Also, following Modi's announcement, the
BSE SENSEX and NIFTY 50 stock indices crashed for the next two days. The term
demonetisation has become much more than a household name since the old Rs 500 and Rs
1,000 notes were pulled out of circulation. While as per dictionary demonetisation means
"ending something (e.g. gold or silver) that is no longer the legal tender of a country", one
needs to understand that there is much more than the literal meaning to the word. One need
to understand that 80% of India's labour force is employed in the informal sector, which
comprise of 45% of the GDP of our country. Over 60% of population of India lives in below
the international poverty threshold line of 1.9$ per day. Since our economy is an under
banked economy, present demonetisation
move, would no doubt cause a severe social experiment, across the segment of our
population. At the first place, and on a short term basis this move would benefit the
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Government, which shall effectively deploy its resources to percolate the impact to the poor
and needy of our country

Impact on RBI balance sheet

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Overview on Banking System

The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43
foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural
cooperative banks, in addition to cooperative credit institutions. Indian banking industry has
recently witnessed the roll out of innovative banking models like payments and
small finance banks. The central bank granted in-principle approval to 11 payments banks
and 10 small finance banks in FY 2015-16.

There are 11,842 Non-Banking Financial Companies (NBFCs) registered with the Reserve
Bank of India out of which a lion's share of 98% are non-deposit accepting with the balance
2% being deposit accepting NBFCs. Since November 2014, 200 non deposit accepting
NBFCs having asset size of Rs 5 bn and above have been classified as systemically
important. The major NBFCs in India have their relative specializations, for e.g. HDFC
(mortgage loans), Mahindra Finance (agri loans), Power Finance Corporation (power
financer) & Shriram Transport Finance (auto loans).

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 OBJECTIVES

1. To study the pros and cons of demonetization.

2. To study the impact of demonetization on banks.
3. To examine the impact of demonetization on public sector bank employees.
4. To analyze the effect on telecommunication company- Bhartiya Airtel

METHODOLOGY
The research is conducted through secondary data using websites, articles.

SCOPE OF THE STUDY

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Banking sector in a flux

If the aam aadmi has been rattled by the cash-crunch post the Centres demonetisation move,
banks that have been on the firing line, are up against a host of new challenges. After three
long years of slowdown, the banking sector had been pinning its hopes on recovery of sorts.
With balance sheet repair underway, post the RBIs asset quality review, banks were just
about prepping the pitch for the next leg of lending.

But the joker in the pack---demonetisationhas once again roiled the picture. In the second
half of this fiscal, gains from a sharp fall in cost of funds and strong treasury income, will be
offset by the marked slowdown in credit growth, steep lending rate cuts, risk of higher
delinquencies and surge in costs.

But short term disruption aside, structural recovery in the sector is now under a cloud. While
it is still early days to gauge the full impact of demonetisation, new loan growth---key to the
revival of the sectorwill take a knock, pushing recovery down several quarters. We remain
cautious and recommend investors to be selective while stock-picking.

Here are four trends and their likely impact on banks performance in the 2018 fiscal.

Surge in deposits

Demonetisation has indisputably aided banks on one fronthigh accretion of deposits. The
withdrawal of legal tender character of old Rs. 500/1000 notes from November 9, and
subsequent caps on drawing out money from banks and ATMs, have left banks flush with
deposits over the past two months.

Sample this. Between October 28, 2016 and December 23 2016, banks deposits have shot
up from around Rs. 107 lakh crore to 112.6 lakh crore---an increase of about Rs. 5.5 lakh
crore in two months. This is nearly twice the amount of deposits that flowed into banks
between April and October 2016.
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But how much of this increased liquidity will stay on in the banking system, once currency
flow normalises and various caps on withdrawal are lifted?

Few bankers are of the opinion that the current level of 40-50 per cent retention of deposits,
can go down to 20-30 per cent over the course of the year. This means that even if we
assume that about two-third of the deposits coming into the system are withdrawn finally,
the growth in deposits at the end of FY17 and FY18 fiscal will be notable and higher than
the 9-10 per cent growth seen in 2015-16.

Way forward

Fall in cost of funds:

Over the past two months, with bank deposits swelling, deposit rates have fallen by a
substantial 50-75 basis points across banks and tenures. While such a steep fall is unlikely
again, banks retaining a portion of the deposits (in the form of CASA and term deposits),
will continue to trim deposit rates. This should lead to reduction in banks cost of funds
through the next fiscal (2018). The uptick in deposits will be commensurate with the market
share of banks. PSU Banks that command a lions share (over 70 per cent) of the deposits,
will be the biggest gainers of the rise in deposits, leading to lower cost of funds.

Good appetite for government bonds:

After the sharp rise in funds post demonetisation, banks began lending such surplus to the
RBI under the reverse repo option. PSU Banks, in particular, aggressively deployed excess
funds in government bonds too. The fall in bond yields is likely to add 15-20 per cent kicker
to banks earnings in FY17.

As withdrawal caps are lifted, and banks are able to gauge liquidity scenario better, parking
huge sums under the reverse repo window will likely halt. Banks instead will look to deploy
these funds for a longer term. Given the slackness in credit growth, particularly in PSU
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Banks, a large portion of excess funds will continue to find its way into the government
bond market. This should bump up banks treasury income in FY18 and aid earnings to some
extent. But after the sharp rally in bonds last year, treasury gains will likely moderate in
FY18.

In the month of November, PSU Banks have been net buyers in government securities to the
tune of about Rs. 25,900 crore. Private Banks too bought (net) around 20,000 crore in
November. In the month of December, the buying spree continued for PSU Banks, who
made net purchases of a whopping Rs.61,000 crore, even as private banks turned net sellers.

Slackness in lending

Banks flush with liquidity, in a falling interest rate scenario, is a perfect recipe for boosting
lending. But tepid borrowing appetite by highly-leveraged corporates and banks reluctance
to lend, has failed to spur loan growth, even after a substantial fall in lending rates over the
past year. Even before demonetisation, credit growth had slipped to 8 per cent levels in the
beginning of November. According to the RBIs latest figures (as on December 23), credit
growth has fallen to a meagre 5.1 per cent, down from 10-odd per cent levels last year. The
growth had already fallen to 5 per cent levels in November, as credit to industry (corporate)
shrunk by 3 per cent.

Credit growth has been closely linked to the pace of economic growth, growing at 2.5 to 3
times the real GDP growth in the past. The multiple at which bank credit has grown in
relation to real GDP has however shrunk over the last two to three years. This is partly
explained by the Centres move to a new series of GDP two years back and weak credit
offtake in public sector banks. In 2014-15 and 2015-16, bank credit has grown at 1.2 to 1.4
times real GDP growth (new series) and about one time nominal GDP growth.

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Way forward

No big recovery:

The Central Statistics Office, recently put out its advance estimate for GDP growth for 2016-
17, which has been questioned by many economists. The CSOs 7.1 per cent growth in real
GDP in 2016-17, has been pegged down by most economists to 6.8 per cent levels. With the
cash-crunch in the economy expected to normalise by the second half of 2018 fiscal, many
economists estimate a 7.6-odd per cent growth in real GDP for 2017-18.

If we apply a 1.2-1.4 times multiple to this, bank credit can, at best, grow by 10-11 per cent
in 2017-18. Also, while bank credit grows at a certain multiple to real GDP growth, the
nominal GDP, matters too, as it in turn decides the credit requirement of a corporate.

With inflation heading lower, the gap between real GDP and nominal GDP shrank in 2015-
16. But in the last Budget, GDP deflator (ratio of nominal to real GDP) another measure
of inflation was assumed to go up in 2016-17 by 3.2 per cent, on the back of base effect.
The CSO while revising the growth in real GDP down, has upped the growth in nominal
GDP to 11.9 per cent as against 11 per cent earlier. If we assume a 7.6 per cent growth in real
GDP for FY18 and a similar growth in deflator then the nominal GDP growth of 11-11.5 per
cent will again mean a 11-12 per cent growth in bank credit (at one time multiple).

Pockets of growth

Even within the modest 10-11 per cent credit growth in 2017-18, the growth will be
concentrated in pockets. In the last three years, PSBs have grown at a far slower pace,
because of their huge exposure to the corporate segment 40-50 per cent of lending is to
large corporates. Credit growth of PSBs plummeted to 4 per cent in 2015-16 from 7 per cent
in 2014-15. In contrast, private sector banks were able to clock a robust 26 per cent year-on-

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year rise in lending in 2015-16. This disparity is likely to continue and the growth in 2017-
18 too will be driven by private banks, as corporate lending will continue to remain weak.

The spate of lending rate cuts recently is likely to trigger growth in retail loans---home loan,
personal and auto loans, and credit cards. Unlike in 2008-09, when in the wake of the global
financial crisis the RBI adopted an aggressive monetary easing and PSBs sprinted ahead,
growing their corporate loans aggressively, the focus this time around will be on retail loans.

The only trigger for loan growth besides consumption driving retail loan growth will be
government spending in FY18.

Margin pressure

With deposit rates trending lower, banks, no doubt, have gained from lower cost of funds.
But moving to the new marginal cost of funds based lending rate (MCLR) structure has
forced banks hands to pass on the benefit to new borrowers at a faster pace. Effective
January most banks have slashed their MCLR by a sharp 75-90 basis points. The price war,
will put pressure on yields on advances and hence margins, thus offsetting gains of lower
cost of funds.

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Way forward

Retail vs corporate

The pressure on margins can be felt more by retail-oriented banks, because transmission of
rate cuts will happen faster there and new growth will be at lower lending rates. On the
corporate side too there will some reduction in rates, but less dramatic. Also growth in
corporate loans will only pick up with a lag, despite rate cuts. The general risk appetite for
corporate lending is low for banks and hence the pressure on growth and pricing will be low.
Overall margins will remain stable to marginally negative for FY18.

Other costs

The biggest setback in terms of costs for banks due to demonetisation has been on account of
recalibration of ATMs and logistics costs involved in transporting currency, in a short period
of time. Also, post demonetisation, between November 9 and December 30, banks had to
waive off ATM charges for all transactions (irrespective of the number) and merchant
discount rate for debit card transactions etc. These will have short term impact on costs.

However over the long run, the sector as a whole will benefit from increased use of digital
modes of transactions, which will improve operational efficiency.

Asset quality woes yet to bottom out

Before we gaze into the crystal ball and predict how asset quality will pan out in FY18, let
us look back at the performance of banks until the September 2016 quarter. Four quarters
after the RBIs asset quality review (in the December 2015 quarter), the NPA problem still
loomed as a key risk to banks earnings. Despite the massive clean-up, between March and
September 2016, gross NPAs went up from 7.8 per cent to 9.1 per cent of total advances.

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Factors that were likely to weigh on the performance of banks (up until demonetisation),
were large slippages into NPAs from the watch list that certain banks such as SBI, ICICI
Bank and Axis Bank had created (of stressed accounts). Also while the pace of quarterly
slippages had moderated (from a whopping Rs. 1-1.5 lakh crore in the second half of FY16
to Rs. 50,000-odd crore in the first half of this fiscal), provisioning requirement was unlikely
to fall substantially due to higher provisions doe older NPAs.

Way forward

Mixed bag

Post demonetisation, there are fresh set of risks to banks asset quality-- supply chain
disruption for large corporates, possible increase in delinquencies in the SME and LAP
portfolio (loan against property) due to cash crunch in the short-term and general slowdown
in the economy. But there are also other factors that are likely to balance out some of these
risks.

For one, the biggest benefit from demonetisation has been the accelerated fall in lending
rates, which should help improve the debt servicing ability of corporates thus easing up asset
quality pressure.

Two, large corporates have been deleveraging - paying off debt, by selling off assets. Asset
sales can accelerate, with steep fall in borrowing costs for the acquiring company.

Three, the RBI has relaxed NPA recognition norms by 60 days, for payments due between 1
November and 31 December on loans up to Rs. 1 crore. This should keep asset quality
steady for the SME segment. The RBI has also offered similar dispensation to famers, for
prompt repayment incentive of 3 per cent on crop loans.

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Risks from retail

Up until now, stalled projects and stress in core sectors have spelt doom for banks with large
corporate exposure. But with banks aggressively growing their retail business, risk from the
huge unsecured portfolio, looms large.

The credit card business that peaked at about Rs. 30,000 crore in 2008 and almost halved by
2011, has been growing steadily by over 20 per cent annually in the last two years--now
a Rs. 46000 crore business. Personal loans too have been growing at a fast clip, ending the
2016 fiscal with a 25 per cent increase, and 17 per cent growth as of November. Vehicle
loans, while secured, are nonetheless riskier than housing loans, as they are offered against a
depreciating asset. These loans, too, have grown by 21 per cent as of November.

Some private banks, having built a strong retail focus over the years, have mitigated risks by
extensively using data analytics and automation to assess the credit behavior of customers.
But PSU Banks, have been late adapters to the usage of credit bureaus, and unless back end
processes of underwriting customers are streamlined, adhoc focus on retail can spew
problems.

In the ensuing quarters, asset quality of retail portfolio will need a keen watch.

SIGNIFICANCE OF THE STUDY

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Positive And Negative Impact

The governments decision on November 8 to immediately demonetize the Rs 500 and Rs

1,000 notes in circulation, which account for 86% of all currency in circulation, has
impacted a raft of sectors. Consumers have turned frugal, causing a sharp drop in demand
for goods and services. While farmers and small industries will bear the brunt and sectors
like transport and real estate will visibly be in pain, several other industrial sectors will have
to scale back services or production.

POSITIVE IMPACT:

Increase in CASA deposits for most banks; lending rates to drop further

The biggest beneficiary from this policy will be the banking sector. This is mainly due to the
queues of people depositing cash in the banks which will result in substantial liquidity with
the banks. As the deposits with the banks will increase so will increase the CASA, which
will increase the Net Interest Income and the Net earnings of the banks. However, this will
not be abnormally high since the RBI has increased the CRR in the short term to mop up
some of this liquidity.

As stated above higher CASA means large amount of deposits are in current and savings
account. This way the banks get funds at no or very low cost (interest). Banks do not pay
interest on the current account deposits and pays a very low % of interest on savings account
deposits. Hence, it is a good measure to get deposits at no or very low cost.

As the banks get a lot of liquidity in their hands, they are expected to enhance the borrowing
cycle by lending the money at a lower rate of interest. Hence, the interest rate on borrowing
will lower down.

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Retail Boost

Despite a number of private e-wallet players popping up, India's banking sector heavily
dominates the retail payment system which will be a clear beneficiary of the cashless state of
the country.
"People may see these channels as being much more convenient compared to the hassle they
may experience in transitioning to the new denomination notes, the report explained.

Increased Deposits

The BJP-led government's move will pull a large chunk of first time users to banks, who will
have to use the system at least once to exchange their old notes for new ones. According to a
study conducted by Moody's, people tend to continue using banking services once they have
crossed the 'first-time user' mark.

This development will increase bank deposits by 1 to 2 percent compared to what they were
before the demonetisation scheme, the report claimed. This, of course, will happen after the
initial surge of deposit inflows, followed by sharp outflows, stabilize in roughly three
months from now.

Though the sudden withdrawal of 86 percent of currency (in terms of value) from the
economy will not reduce people's dependency on cash in the near term, bank deposit levels
will benefit in a "more meaningful fashion" once the informal economy is brought into the
formal economy over the next few years.

While banks stand to benefit from some aspects of demonetisation, there could be negative
fallout as well.

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Moody's expects the asset quality of loans against properties to deteriorate as real estate,
which often involves black money transactions, will be hit by demonetisation. Even the
micro-finance segment will be impacted since it is primarily a cash heavy segment.

With doubts about how long this storm will last, the report warns that the banking system
and the corporate sector (both small and big) will be deeply impacted if the "economic
weakness" prevails for a longer period of time.

Closing Bell

Indian shares climbed as gains in banks and automakers offset losses in select energy
producers and real estate companies.

The S&P BSE Sensex rose 0.6 percent to 29,409 while the NSE Nifty gained 0.6 percent to
reclaim the 9,100-mark. The market breadth was skewed in favour of the buyers at 2:1.

Marsons Hits Over 1-Month High On New Order

Shares of Electrical Transformer maker Marsons Ltd. gained as much as 11 percent to Rs

13.25, the highest level since February 17 this year, after the company won an order worth
$118.4 million under the Deen Dayal Upadhyaya Gram Jyoti Yojana in Odisha.

Pros:

Increased share of savings moving to banks; high CASA ratio ( lower cost of funds). Lower
bond yields resulting in high treasury gains ( particularly PSU banks). Governments move

15
to remove higher-value banknotes from circulation would lead to a surge in deposits,
allowing lenders to eventually lower lending rates and lower costs to service the sectors
debt.
Paradigm shift towards cashless economy

Gold Finance: Positive in medium term Near term disbursements to get hit as high cash
dealing; However, 75% of gold lending is from unorganized segment which will gradually
shift to organized players
Micro finance: Positive in medium term 70% transactions done in cash;
Near term disbursements/collections to get hit; However, positive in
medium to long term as borrowers shift to bank accounts.

NEGATIVE IMPACT: MFIs, NBFCs miss collection cycles

NBFCs and microfinance institutions (MFIs) are under severe stress as their collection
cycles (mostly in cash) have gone awry post November 8. Most NBFCs and MFIs have
announced collection holidays till such time theres sufficient money in the system.

The governments demonetization drive may puncture the earnings of most banks this
quarter. With most staffers handling the Rs 500 and Rs 1000 note deposits, exchange and
withdrawals, revenue-yielding operations such as vending loans and cross-selling
investment products have taken a backseat in most banks.

The earnings of banks may take a hit in the third and fourth quarter. We may not see loan
book growth as most banks are busy facilitating the demonetization process. Theyre not

16
aggressively selling a lot of credit products now. That apart, the SME and real estate sectors,
to which most banks lend a significant part of their book are in a state of major flux.

Temporary measures to mop up liquidity:

The Reserve Bank of India or RBI has announced incremental CRR (cash reserve ratio) of
100% on the growth in bank deposits between 16 September 2016 and 11 November 2016.
The entire incremental deposits (~Rs3.2 Tn) in the prescribed period have to be parked with
the RBI as CRR. No interest will be paid on CRR, while banks will have to shell out ~4%
interest on the funds received in savings deposits. Not only the expected positive carry on
incremental deposits has been wiped out, but there will also be a negative carry on such
deposits. The higher CRR is a temporary measure to drain liquidity in the banking system
and will be reviewed in the fortnight ending 9 December 2016 or even earlier.

This is a temporary measure to suck out excess liquidity in the banking system after the
announcement of demonetization by the government as banks were parking bulk of the
receipts through reverse repo window. Given the RBIs limited capacity to accept funds
under reverse repo and related interest outflow on the same, the central bank announced
parking of incremental deposits under CRR which entails no interest outflow.

Cons:

With any sharp infusion of deposits and relatively limited avenues to lend, the credit deposit
ratio for banks would become unfavorable, and thus impact margins. Negative from credit
growth perspective and asset quality challenges (banks with high SME exposure) Reduction
in deposit interest rate due to high liquidity

Housing Finance: Negative LAP/ developer loans may see increased delinquencies;
underlying demand slowdown to affect credit growth.

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Auto Finance: Negative: 60- 70% transactions are done in cash; resale values likely to come
down for vehicles; Asset quality issues to worsen.
Asset Finance: Negative: As large chunk of cash based business of asset financing suffers a
setback.

Case Study

HDFC BANK INVESTMENT ADVISORY GROUP

registered under SEBI (Investment Advisors) Regulations, 2013.

The move by the government to demonetize Rs.500 and Rs.1000 notes by replacing them
with new Rs.500 and Rs.2000 notes has taken the country with surprise. The move by the
government is to tackle the menace of black money, corruption, terror funding and fake
currency. From a market perspective, we think that this is a very welcome move by the
government and which has taken the black money hoarders with surprise. The total value of
old Rs.500 and Rs.1000 notes in the circulation is to the tune of Rs.14.2 trillion, which is
about 85% of the total value of currency in circulation. This means that the total cash has to
now pass though the formal banking channels to get legitimacy. The World Bank in July,
2010 estimated the size of the shadow economy for India at 20.7% of the Gross Domestic
Product (GDP) in 1999 and rising to 23.2% in 2007. Assuming that this figure has not risen
since then (quite unlikely though) and that the cash component of the shadow economy is
also proportional (it could be higher), the estimated unaccounted value of the currency could
be to the tune of Rs.3.3 trillion. Now, post the announcement of demonetization by the
government this money would have to either accounted for by paying the relevant tax and
18
penalties or would get extinguished. There are higher chances of larger proportion of this
unaccounted currency getting extinguished as the tax rate and subsequent legal issues could
be prohibitively high for such money. The positive macro benefits of this move by the
government This move by the government is likely to have long term benefits for the
economy. The extinguishing of the major proportion of unaccounted currency would reduce
from the liabilities of the government and would add to its finances. This can have very
strong implication as the government would get money to spend without borrowing from the
market. This would mean that while interest rates can be low, the government spending on
large infrastructure (we assume that the government would use large proportion for infra
spending) projects would kickstart capex cycle and push economic growth higher in the
medium term. The move is also likely to have a habit changing impact in the Indian
populous and there could be increased belief of keeping cash in the banks rather than stashed
at home and use formal banking channels for their spending needs. With a large part of the
cash moving through the banking channels, the banking sector is likely to be flush with
funds in the near term and this would help them reduce cost of funds for such period. Also
with more money being kept in the banking channel, some of these low cost deposits may be
sticky and improve the medium to long term Current Account and Savings Account (CASA)
ratio of the banks. Another element of the demonetization would be reduction in cash
transactions in real estate. This is likely to reduce to real estate prices and make it affordable
to some extent. This may be visible more in the rural belt, where many non-farming entities
purchase fertile farmland, not for farming but for money parking purpose. The
demonitisation and consequent reduction in shadow economy would bring the demand for
such farm lands down. This move is likely to lead to better tax compliance, raise the Tax to
GDP ratio and improved tax collection. This could lead to lower borrowing and better fiscal
management. Also with lower cash transactions in the near term, inflation may see
downtrend in the near term. Also with higher tax to GDP ratio, the government may also get
enough headroom to reduce the income tax rates, which can lead to higher disposable
income with people and can improve consumption demand in the medium to long term.
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However there could be near term challenges In the immediate term, the reduced ability of
the unorganized sector to deal in cash would impact the demand. Consumption items which
had large element of cash dealing involved may see lower demand. Real estate and allied
sectors may see near term to medium term negative impact. This HDFC Bank Investment
Advisory Group November 11, 2016 may also lead to corporate earnings getting impacted in
Q3FY17, as a large part of the old currency gets extinguished and takes time for fresh money
to come into circulation.

L&T Construction Wins Order Worth Rs 2,903 Crore

Shares of the construction major gained 0.3 percent after its unit bagged an order to re-
develop Mumbais BDD Chawls for Maharashtra Housing and Area Development Authority,
according to a statement on exchanges.

The work includes design and construction of 20 residential towers for rehabilitation, four
high-rise towers for sale and one commercial development.

The contract will be the largest residential project awarded to L&T Construction so far.

Aurobindo Gains Post U.S. FDA Nod

Shares of Aurobindo Pharma Ltd. gained after the company in an exchange filing said that it
received a final approval from the U.S. FDA to manufacture and market Meropenem
injection 500 mg/vial and 1 g/vial.

20
The injection is used for the treatment of complicated skin and skin structure infections,
complicated intra-abdominal infections and bacterial meningitis. This was the first ANDA
approval for the company's formulation facility in Bhiwadi.

Shares gained as much as 2 percent to Rs 683.85.

21
 CONCLUSION

Demonetization is a generations memorable experience and is going to be one of the

economic events of our time. Its impact is felt by every Indian citizen. Demonetization
affects the economy through the liquidity side. Its effect will be a telling one because nearly
86% of currency value in circulation was withdrawn without replacing bulk of it. As a result
of the withdrawal of Rs 500 and Rs 1000 notes, there occurred huge gap in the currency
composition as after Rs 100; Rs 2000 is the only denomination.
Absence of intermediate denominations like Rs 500 and Rs 1000 will reduce the utility of
Rs 2000. Effectively, this will make Rs 2000 less useful as a transaction currency though it
can be a store value denomination.
Demonetization technically is a liquidity shock; a sudden stop in terms of currency
availability. It creates a situation where lack of currencies jams consumption, investment,
production, employment etc. In this context, the exercise may produce following short
term/long term/, consumption/investment, welfare/growth impacts on Indian economy. The
intensity of demonetization effects clearly depends upon the duration of the liquidity shocks.
Following are the main impacts.
Demonetization is not a big disaster like global banking sector crisis of 2007; but at the same
time, it will act as a liquidity shock that disturbs economic activities.

Liquidity crunch (short term effect): liquidity shock means people are not able to get
sufficient volume of popular denomination especially Rs 500. This currency unit is the
favourable denomination in daily life. It constituted to nearly 49% of the previous currency
supply in terms of value. Higher the time required to resupply Rs 500 notes, higher will be
the duration of the liquidity crunch. Current reports indicate that all security printing press
can print only 2000 million units of RS 500 notes by the end of this year. Nearly 16000 mn
Rs 500 notes were in circulation as on end March 2016. Some portion of this were filled by
the new Rs 2000 notes. Towards end of March approximately 10000 mn units will be printed

22
and replaced. All these indicate that currency crunch will be in our economy for the next
four months.

Welfare loss for the currency using population: Most active segments of the population
who constitute the base of the pyramid uses currency to meet their transactions. The daily
wage earners, other labourers, small traders etc. who reside out of the formal economy uses
cash frequently. These sections will lose income in the absence of liquid cash. Cash
stringency will compel firms to reduce labour cost and thus reduces income to the poor
working class.
There will be a trickle up effect of the liquidity chaos to the higher income people with time.
Consumption will be hit: When liquidity shortage strikes, it is consumption that is going to
be adversely affected first.

Consumption Production Employment Growth Tax revenue

Loss of Growth momentum- India risks its position of being the fastest growing largest
economy: reduced consumption, income, investment etc. may reduce Indias GDP growth
as the liquidity impact itself may last three -four months.

Impact on bank deposits and interest rate: Deposit in the short term may rise, but in the
long term, its effect will come down. The savings with the banks are actually liquid cash
people stored. It is difficult to assume that such ready cash once stored in their hands will be
put into savings for a long term. They saved this money into banks just to convert the old
notes into new notes. These are not voluntary savings aimed to get interest. It will be
converted into active liquidity by the savers when full-fledged new currency supply take
place. This means that new savings with banks is only transitory or short-term deposit. It
may be encashed by the savers at the appropriate time. It is not necessary that
demonetization will produce big savings in the banking system in the medium term. Most of
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the savings are obtained by biggie public sector banks like the SBI. They may reduce interest
rate in the short/medium term. But they can't follow it in the long term.

Impact on black money: Only a small portion of black money is actually stored in the
form of cash. Usually, black income is kept in the form of physical assets like gold, land,
buildings etc. Hence the amount of black money countered by demonetization depend upon
the amount of black money held in the form of cash and it will be smaller than expected. But
more than anything else, demonetization has a big propaganda effect. People are now much
convinced about the need to fight black income. such a nationwide awareness and urge will
encourage government to come out with even strong measures.

Impact on counterfeit currency: the real impact will be on counterfeit/fake currency as its
circulation will be checked after this exercise.
Demonetization as a cleaning exercise may produce several good things in the economy. At
the same time, it creates unavoidable income and welfare losses to the poor sections of the
society who gets income based on their daily work and those who doesnt have the digital
transaction culture. Overall economic activies will be dampened in the short term. But the
unmeasurable benefits of having more transparency and reduced volume of black money
activities can be pointed as long term benefits.

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 SUGGESTIONS

Due to Demonetisation there is a huge surge of liquidity in the banking sector.

If that amount stays idle in the banking system it would be a loss to the bank. So to absorb
liquidity RBI has change the CRR to 100% recently, but again, this is a loss to the banking
sector as they don't receive any interest.

So, banks has an option to decrease it's loan interest and incourage people for loans. Housing
loans might become cheaper. It wil benefits people who has a plan to buy house.

If more people applys for loan bank will increase it's profitability. Anyways there is a win
win situations for both banks and consumers.

The other option is to buy government bonds and securities. But right now there is a crunch
of bonds in RBI.

So with the help of government of India new bonds would be issued and the excessive
liquidity can be used in completing the pending projects and thereby developing the
economic growth

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 BIBLIOGRAPHY

http://www.indianeconomy.net/splclassroom/309/what-are-the-impacts-of-demonetisation-
on-indian-economy/

https://www.hdfcbank.com/assets/pdf/Event_Update_Demonetization_and_its_impact.pdf

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