Effects of Demonetization of Rupee on Real Estate, Gold, Debt, Equities (and more)

The sudden announcement of the government to make currency notes of Rs. 500 and Rs. 1000 invalid as legal tender from the midnight of November 8, was an impactful move to crack the whip on black money and money laundering.  The carefully deliberated move is said to be an outcome of six months of careful planning, which only a few key people including Prime Narendra Modi, the RBI governor were privy to.  Here is how the demonetization of Rs. 500 and Rs. 1000 can impact the money market, investments and real estate.

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Impact in the cash economy

The currency denominations in the form of Rs. 500 and Rs. 1000 comprise 84 percent of the money in circulation.  Cash transactions have an essential role to play in informal markets (like groceries and markets), real estate and construction-based business and gold.  The role of cash in markets like real estate and gold is essentially questionable, but it is vital for informal and unorganized sectors. Small -time farmers need to off-load their produce in the local market for cash;  declaring Rs. 500 and Rs. 1000 notes as invalid suddenly, can impact their livelihood albeit for a short time. It is expected that with fresh notes in circulation in the coming few months, the issue is going to ease out.


Effect of demonetisation of rupee on the GDP of India

The sudden decline in the money supple and immediate increase in bank deposits is going to negatively impact  consumption demand for the short term. The adverse impact on construction, real estate and informal sectors can lead to reduction of GDP. Curbing of money supply can cause deflation in the economy, leading to reduction of general level of prices in the economy. Tax collection to GDP ratio is 17 percent, it will be moved up by to 18 or 19 percent.  It won’t have a very drastic impact, Normally, people have invested money, as they may have done in property, gold, inventory or receivables There may be a limited impact in circulation but they can be manageable in the long run. Read more about tax calculation for black money and the 2.5 lakh deposit limit. .


Effect of Demonetization in debt (bond) markets

Increase in deposits can lead to demand for government bonds and other high rated bonds in a situation, leading to lowered bond yields. With an influx of deposits, the rates will reduce and the yields will be lowered.

 Impact of demonetization on bank deposit rates

With large amount of cash being diverted into banks by way of deposits, it will reduce the bank’s dependence on high cost borrowings.


Effect of demonetization on vehicle purchase

Sales of vehicles in the second-hand market can reduce, which can also have a cascading effect on OEM sales, because buyers will find it difficult to dispose their old vehicles easily.


Effects of Demonetization of Rupee on Gold and Jewelry Items

You can expect the prices of jewelry to fall in the next two or three quarters, the unorganized sector can be affected worse due to unaccounted inventor and high amount of cash sales.  There is no going to be much of a negative impact to jewelery exporters as they are a part of an organized market and transactions are done, on the basis of an invoice.  While 70 percent of the jewelry and gems market is unorganized, 20 percent of the market contribute to 80 percent of the business. It is a very good decision in the long-term especially for the organized sector.

Reduction in demand for consumer durables

For the short term, the purchases of consumer durables in cash, can be impacted due to reduction in discretionary spending.

 High end retail products to experience drop in prices

Luxury products and high end fashion retail that have a discretionary demand may experience reduction in demand.


 Impact of demonetization on e-wallets

it is believed that the demonetization of Rs. 500 and Rs. 1000 is  going to give a major impetus to the recently launched UPI (United Payment Interface) and e-wallets like PayTM and Mobikwik.  They have already stepped up the bandwagon with taglines like  Cash is so Yesterday and ATM Nahi, PayTM karo’. Vendors like Ola have also stepped  up their notifications to their  passengers to go ‘cashless and  recharge with Ola Money.


Effects of demonetisation on real estate

The unorganized sector and secondary (resale) property market can be affected by the government’s decision to demonetize Rs. 500 and Rs. 1000 notes.  The housing prices are expected to go down, fueling demand for the sluggish sector.

There is not going to much of an impact on the primary residential market because the buyers in this category usually make purchases in the form of loans mortgage or making check payments. The impact may be felt in the secondary market which is known to deal in cash. While the demonetization will have little impact in large cities, transactions in Tier 2 and Tier 3 cities where cash components are higher, may witness a higher impact, according to the JLL India report.  The commercial real estate is not expected to be impacted much because cash components do play much of a part in these transactions.

Demonetization is being looked upon as a good move to institutionalize the real estate sector.  One can expect more opportunities for institutional capital, debt investments, private equity and FDI players because of the increased transparency in the dealings.  Banks can also start funding land and plot-based transactions, reducing land prices.

 Impact of demonetization on equity and mutual funds

With more money coming into the formalized system, the effect is expected to be quite positive.  Since money is in white, equities will grow.  People will be paying more taxes and would be willing to invest in ELSS schemes to save Rs. 1.5 lakh on taxes.  More investments can lead to more wealth creation and better economic growth. Since more money paves into a formalized system, it will augment into healthy  practices like investing in equity mutual funds for wealth creation, on a long-term.

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