From the stroke of midnight of Tuesday, 8th November, 2016; Prime Minister of India banned the usage of Rs. 500 and Rs. 1000 notes of Indian National Currency. A similar note ban call was last implemented around 30 years ago. This is taken as one of the strongest move by the modern era Indian Government. The majority of industries and citizens alike reacted to this conclusion with powerful support. However, the call has sustained mixed reactions till now.
Taking everything into account, this scheme will impact the small businesses, financial institutions & secondary markets – all at some level or the different. The impact may not last very long, but is sure to have its affects in next 60 days.
1. Businesses based on cash transactions
Almost all of road side vendors, shop owners and small business have been running on cash based transactions till now. The current situation of demonitisation has left these businesses with least customers in all these years. People might debate that these business owners may not be earning above the taxable limits; but 90% of these owners never deposited the money in the banks and thus contribute towards black money hoarding. Thus, such move will push them to start depositing money in banks and be accountable to it. Most of these vendors have now started keeping card swiping machines and other online payment methods.
2. Getting loan from bank would be cheaper
Banks have testified a surge in deposits since the call of demonitisation. According to RBI, till now banks have received cash deposits of over Rs.1 lakh crore. The plenty has come from people & businesses who have earned the money legally but didn’t trust banks for safeguarding it. Indian banks have rolled out 2 impactful observations after such massive deposits. People or businesses who were loan defaulters have deposited cash in their accounts, thus clearing all loans. This has brought banks to cash surplus and thus they are now in talks to announce cuts in interest rates for obtaining loans.
3. Fall in Equity prices
This would further be tough for the secondary market involved with trading of equity, stock options, & other financial instruments. There is an expected fall in prices of equity as the public owning them would be interested in selling off their investments that now has a diminished rate of return. However, there would be a developed interest in bonds. The rise in a value of money because of the banned 500 & 1000 rupee notes in India would lead to the important impact on business-related debts. Although there will be the important reduction in the interest rates, the efficient cost of the debt would go up due to the rise in the value of money. Thus, small businesses would end up paying extra.
4. Deflation in the economy
Economists have estimated that the coming 6 months are expected to witness a significant level of deflation in the Indian economy. Businesses like real estate, unorganized trade, construction material, developer, used cars business and other secondary markets will have to slash down their prices unfavorably; as most of the transactions in these businesses were cash based till now. However, the impact is not predicted to be long term.
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