What happens if ₹500 and ₹1000 notes are discontinued in India?

  1. The RBI is unearthing the black money by denying legal tender status. Imagine I am real estate developer stuck with hundreds of crores of rupees in cash (I cannot deposit it in a bank if it exceeds Rs. 50000 without my pan number). This way the RBI prevents these currencies from circulation. The amount of money supply and the velocity of it will be affected. This will have a decelerating effect on prices and may cause deflation.
    source : economictimes

  2. The RBI knows from its books as to how much of these currencies have been issued. Let us say it is 100 billion rupees. By removing these large bills, and if not replaced, high denominated currencies will become a rare sight.
  3. India has less than 100 banks and a little over 1000000 branches (I don’t have the data). These are 680000 villages. Nearly most of them don’t have a bank. This new policy will be a huge shock for them. All their trades are mostly through currency transaction. The next time they try to take their 500 rupee note dated prior 2005 to trade they will be told that it is not a legal tender and so will not be accepted. Now all these rich land lords and rural politicians have to rush to banks in the city to exchange these higher denominated currencies issued prior to 2005.
  4. Poor understanding of intention of RBI will lead to even shop keepers demanding currencies with a face value of 100 Rs or less for transaction.
  5. Believe it or not, if this policy is implemented most of the illegal and black money used by politicians during election will disappear from circulation once for all.
  6. The policy will not affect 80 to 90 percent of the population. Our per ca-pita GDP is less than 1 lakh rupees. They won’t have much cash in their hands to worry about this new ruling. The bank will always accept a few of these currencies and that will pretty much take care of them.
  7. This is an indirect way of reducing money supply and its velocity. Slowly our country will move towards paperless currency. Every rupee in circulation with then be accounted for and so the local black money can be easily unearthed.
  8. In my personal opinion, this is an important move. It may look innocuous to lots of people but for those who have hoarded wealth in cash, this will be a real headache as to how to convert it.
  9. The linkup between the bank accounts and the income tax department already exists. A rich man with enormous cash, if he approaches the bank to convert, the spot light will be on him.
  10. Many countries have issued new currencies replacing existing ones. Mexico, Argentina, Turkey, Israel, and Germany to name a few have done it in the past. If our government decides to make for example every old 100 Rs note to a new 10 Rs note, then the new 500 or the 1000 rupee denomination will become really scarce.