Indian currency crisis (demonetization)


#1

With the many postings that have happened in the past regarding bitcoin and cryptocurrency I’m actually a little surprised to see no mention of the current currency experiment/crisis going on in India.

To summarize, without any warning the PM has decided that all large currency (500 and 1000 Rs bills) were immediately null and void. These are bills that account for some 90% of all cash in circulation. India is also largely an all-cash economy and most businesses are not equipped to handle cashless transactions. The move is said to try to stave corruption, terrorism, tax evasion, and counterfeiting.

As one could predict, this has not done anything to hurt criminals or the rich (the kind of people who tend to have their holdings elsewhere – one source says that 1-2% of Indian currency is actually considered “black money”) – but instead it’s crushing the working and poor who can’t buy/sell anything and are stuck waiting in queues for hours to try to exchange their worthless notes for new ones (and you can only exchange a small amount of currency at a time). Soon you’ll only be able to deposit (not exchange) these old notes into government owned banks, and soon after they will only be worth the paper they are printed on.

As an outside observer, this is all quite fascinating – and horrifying at the same time. I’ve heard mixed reactions from my Indian coworkers on this – a mix of shock, frustration, and support. As our resident economist, I would definitely be interested in @Humbabella’s take on this.




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#2

The sum total I know about this is what I heard on The Bugle last week…seems mad to me.


#3

What a great way to prevent anyone from taking your currency seriously in the near future. Meanwhile, the only thing the US has ever demonitized was a few specific types of postage stamp during the Civil War. Other US postage stamps of that era are still valid as money, despite how strange that sounds in a modern context.


#4

The Economist has been covering this and FT as well.

I’ve no idea where that 1-2% black money figure came from but from what I’ve read and heard over the years that is far too low.


#5

It makes sense - why keep all your illicit assets tied up in the volatile local currency when there’s gold, Swiss banks, and more stable foreign currencies (Euro, USD). I’ve seen the 1-2% figure several places (including the linked Time article).


#6

The Rupee isn’t volatile if both your income and expenses are domestic. Goals hoarding in India is another matter and that too influences not actual cash supply but cash flows on the regional & national level.


#7

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