Probable Impact of the New Rs 5,000 Deposit Limit

Wed, 21 Dec Pre-Open

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The demonetisation saga rolls on and we're just 10 days ahead of the deposit deadline for old currency. The move has put the functioning of black money market into question. The result of this exercise are good for the economy in the long run - or so is the consensus. We too think this move by government is a step in the right direction.

But whatever the case may be, there are some short term hiccups felt by the common man. Long queues at the ATM's and banks, cash crunch, problems with the new Rs 2000 note, fall in demand and consumption, etc. are all the reasons to complain. So the move has had a polarising effect on people's opinions. And the government has deservedly received both applause as well as criticism.

So far, so good. But the saga doesn't end here. As India moves closer towards the December 30^th deadline, the amendments by the government keep on coming. The most recent announcement here is the strict curbs imposed on deposit of Rs 500 and Rs 1,000 notes in bank accounts. This comes as the RBI announced that deposits of more than Rs 5,000 in old Rs 500 and Rs 1,000 notes can be made only once per account until 30 December.

The announcement has received much criticism so far. Many economists are of the view that this will add to the woes of those still waiting to deposit old notes. The move will lead to increase in the number of depositors at the bank. This will mean even longer queues and more time taken to deposit old notes.

Furthermore, the government has also asked banks to question the depositor in the presence of at least two bank executives on why he or she could not deposit the amount earlier. The implications due to this move could also be many. The scrutiny will require more manpower by banks. Also, the scrutiny will mean more time required to process a transaction and the effect of same will be felt on subsequent depositors awaiting to deposit their funds.

The other side of this coin is that the move will abolish proxy attempts to launder unaccounted cash. The number of unused accounts that are being used to launder old notes will come down significantly. As a result, black money holders will have no way out but to pay tax on the same.

In all, the move can lead to some hassles over the next few days but it will result in more black money being accounted for and taxed by the government.

Meanwhile, we will keep you posted on developments regarding demonetisation and its impact on the Indian economy as well as companies and sectors. Stay tuned...

For all those who want to truly understand demonetisation, Vivek Kaul has written an insightful report, Demonetisation: The Good, Bad and Ugly. We believe it is required reading.

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