Demonetisation – macro gains in the offing for India

NEW DELHI – The surprise move by the Modi Government to curb the menace of black money and counterfeit notes by declaring that India’s highest-denomination currency notes of INR500 and INR1000 are no longer legal tender from November 9 could, depending on the intensity of withdrawals by the public, lift banking liquidity in India by anywhere between INR1.5 trillion and INR3.5 trillion, according to a research note from ANZ Bank.

The INR500 and INR1000 notes together account for 85% of all currency in circulation in India.
“Despite the short term negative effects on consumption, especially consumer durables, and cash-intensive sectors such as real estate and cement, we believe the demonetisation move is ground-breaking,” ANZ says.
“A flush in liquidity will aid improvement in the monetary transmission mechanism, thus leading to lower lending rates.
“In our view, this will also likely enable the Reserve Bank of India (RBI) to maintain neutral liquidity without having to resort to Open Market Operations.
“We also expect a boost to revenues via a widening in the tax base and better tax compliance, along with the potential for a one-off dividend payout by the RBI.”
In the short term, ANZ said, inflation would remain benign due to negative effects on activity.
“Over the medium to longer term, however, the net impact on inflation is expected to be neutral as income and demand will improve due to higher public spending.
“Additional fiscal space will allow the Government to remain committed to fiscal rectitude, thus ensuring that inflation remains on the RBI’s projected path.”  www.live.anz.com (ATI).