India has decided to withdraw high-denomination banknotes in its biggest crackdown against corruption and unaccounted money or “black money”. Indian Prime Minister Narendra Modi, in an unscheduled address to the nation, announced that all INR 500 and INR 1000 notes would cease to be legal tender with effect from November 9, 2016. People will be able to exchange their banned notes at banks between November 10 and December 30, 2016. New INR 500 and INR 2000 denomination notes will be issued to replace the ones which are withdrawn from the economy.
Why the Sudden Crackdown?
This step by Narendra Modi, who is approaching the half-way mark of his term as Prime Minister, is seen as an attempt to fulfill his election promise of curbing tax evasion and recovering illegal income, and money stashed overseas.
This move of the government aims to bring billions of unaccounted wealth into the mainstream economy, as well as hit the finances of Islamist militants who target India and are suspected of using fake INR 500 notes to fund their operations.
Immediate Impact of the Ban in India
This move induced chaos across major cities as people lined up outside ATM’s following the announcement. Credit card transactions are expected to rise while the sale of gold and jewelry is expected to fall as most transactions involving gold and jewelry is done on cash basis. On the other hand, bank deposits are set to surge increasing liquidity in the financial system.
What Does This Mean for Nepal?
- In Nepal, the demonetization of the Indian currency will potentially hit the border economies the hardest. With a majority of the Nepali population living near the India-Nepal border and reliant on cross border transactions for daily income, the sudden demonetization will cast an air of uncertainty over them.
- Furthermore, for Nepali nationals who currently hold large sums of INR 500 and INR 1000 notes, the plausible course of action would be to exchange INR notes into NPR or USD at a loss.
- Last year’s border blockade spawned black markets in Nepal, which led to large accumulation of black money in INR 500 and INR 1000 denominations. With a majority of this still stashed, the demonetization of the INR could lead to a push towards gold, as gold is considered a safe-haven. Hence, rise in demand and prices of gold is likely to occur.
With panic starting to spread in the border economy of Nepal, Nepal Rastra Bank (NRB) needs to formulate a clear policy with regard to the demonetization of the Indian currency and act swiftly to address this issue and direct people as to what they can do with their Indian currency. These policies should not be Kathmandu-centric but should also prioritize border economies as they are at a greater risk.