UPDATE: Indian Cash Crisis

We have heard in news flows of the currency that has been taken out of circulation and seen the riots outside of Indian banks. However, it is important to understand what is actually happening. On the 8th November 2016, the Indian prime minister, Narendra Modi, came out and took both 500 and 1,000 rupee (£6 and £12) notes out of circulation. These were the two most popular notes. This has put huge pressure on the economy with over 85% of the money that was in the economy; being deemed as not legal tender. Today at midnight marks the deadline for declaring or depositing 500- or 1000 rs notes.

What has happened to Indian rupees?

The removal of 500- and 1000- Rs denominations was a shock move from the Indian government an in attempt to rid money launderers and criminal groups and widen the tax base in a country where just 1% pay any income tax. To phase in this currency measure, Indians have been able to change a specified limited number of the notes for new notes. This has led to huge queues outside of post offices and financial institutions along with riots.

There has been major fallout from this governmental action as many in the rural areas are heavily reliant on cash. A large number do not have bank accounts and have a fundamental requirement for cash in their daily lives.

narendra modi indian rupee cash crisis

What is the impact of India’s cash crisis

There have been a large number of high profile bank robberies; especially in the Kashmir region. Many are citing the main reason behind this as being the struggling finances of separatist militant groups.

Outside of the currency crackdown and the effects on the militia groups, many simple transactions ceased immediately with the notes in question due to being effectively worthless. The immediate result has been a huge impact on currency in circulation; which is speculated to be over 50% lower than prior to the announcement.

Modi has been successful in taking what he termed “black money” from many groups. However, the robberies that have followed are the first in years to be linked to various militia groups, showing the real impact on the finances of criminal factions. Many militant groups have attempted to distance themselves from this increase in crime. They are being widely blamed on those who are against freedom and outwardly anti Islamic. Violence has also increased with almost 100 killed in protests that took place in Kashmir. There were also 19 soldiers killed recently in an army base in India; with an almost 50% rise in the number of Indian army deaths this year compared to the last. The innocent masses have had terrible blowback from the results of this move; starving most of their basic requirements and forcing them to stand in queues and protest.

VIDEO: India Cash Crisis, SOURCE: BBC NEWS

We wait to see what the fallout will be from this heavy handed move.

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Summary
Article Name
UPDATE: Indian Cash Crisis – Where has the volatility come from?
Description
We look at the recent moves by the Indian government in relation to currency and the chaos that has been caused
Author
Trade Finance Global