A historic event in India Rs.500, Rs.1000 notes Banned | New 500 & 2000 rupee notes | SBI working to make Rs 100 notes available

Prime Minister Narendra Modi today announced the demonetization of Rs 500 and Rs 1000 currency notes. Deepak Kanakaraju of DigitalDeepak.com puts forth his opinion on the historic move..

First, people who have a lot of cash, legally earned, will deposit it in the bank. This will increase bank’s deposits by a huge margin.

This will also increase the lending activity because banks have a CRR (cash reserve ratio) to maintain and with more deposits they can do more lending.
Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.

Because people who have illegally earned this money may be afraid to deposit it in a bank. There are people with crores of cash, black money, earned through illegal ways, such as corruption, smuggling etc.
Must read: How ‘black money’ keeps an economy from flourishing

Some of these guys will try to find this money into a bank, but they have to declare it as income and pay taxes on it. 

Now no one can predict the extent of the deflation and inflation. In an ideal world, if 100% of the people who have Rs.500 and Rs.1000 notes have it as white money, then we would see only inflation. If a lot of these are black money and if many people decide to waste the money instead of depositing it, then we will have deflation in the short term.

If you see heavy deflation and heavy drop in prices, then it means that India has a lot of corrupt people who earned money in illegal ways, too afraid to deposit the money in a bank!

And my gut feeling says that we would see heavy deflation in the next 6 months. If you bet on this, then buy gold, stocks of asset-heavy companies.

It would crash slowly and recover quickly. That's because, in real estate, there is no index price like gold and it is fixed by the's market in a demand-supply balance.

What about Real estate?

It would crash slowly and recover quickly. That's because, in real estate, there is no index price like gold and it is fixed by the market in a demand-supply balance.

But if I want to sell it because I need money, I wouldn't get a buyer immediately. Because most buyers in real estate are doing the transactions in black money. Potential buyers would tell me that they don't have 1.5 crores in white money, so they will not be able to buy it.

With less potential buyers in the market and fewer people having white money, the demand for the land goes down and drives down its price. If I yield and sell it for 1.2 crores, I am driving down the market price in the entire locality.

Real estate crash will happen slowly because people will yield to the pressure slowly and start selling at lower prices because suddenly the pool of potential buyers have gone down. I predict that real estate prices would dip to lowest by end of 2017 and then start moving up again as inflation catches up.

[Currencies, inflation, deflation, payments and banking is a very interesting subject for me and I have read a lot of books on this topic. This is just my opinion, but I am bold enough to share this in the public domain. However, I may be wrong. Let's see how this pans out. Today is an iconic day in India's journey. History in the making. Nov 8th 2016! This would be a day to remember.]