These past few weeks, the news affecting global markets has been focused on the new U.S. Presidential administration and the dizzying pace of change being made – with no shortage of controversy.
This week, however, I want to highlight a developing story in another part of the world entirely. It started on the same day we had our U.S. election and it directly affects 1.25 billion people – quadruple the population of the U.S.
Indian Prime Minister Narendra Modi shocked his country on Nov. 8 by announcing that 500 rupee ($8) and 1,000 rupee ($17) notes – 86 percent of the total currency then in circulation – would no longer be valid, effective virtually immediately. Holders of those notes could turn in small amounts to their banks for credit in their accounts. Handing in larger amounts required paperwork to document the source of the funds.
The disruption to the Indian economy that resulted was enormous. In order to fathom it, imagine the U.S. as a cash-intensive economy and our government suddenly declaring that 10- and 20-dollar bills were worthless pieces of paper.
While we on the foreign exchange desk usually get our information from financial news sources, I also got some interesting first-hand reports about the impact of this “demonetization" from colleagues who are originally from India and have either visited since November or been in touch with family there.
Joe Mathai, regional manager of City National's branch network in Northern California, told me that there has been a stark difference in impact between India's urban and its rural populations. Daily life in the countryside, where about 70 percent of India's population resides, was heavily disrupted. Cash is the basis of almost all commerce there, including buying food, taking transportation and other necessary transactions.
The justification for this demonetization is an attempt to curb illegal financial activities that pervade the Indian economy – everything from tax avoidance to counterfeit currency. Indians often buy cars and houses with cash so that these transactions avoid official detection. Part of the idea behind the move was to force the Indian economy away from these cash transactions.
Vibhore Bhaskar, senior investment officer with City National Securities, made the point that, as painful as this move was for many, it is a bold attempt to pull India's economy into a different mindset and structure. Forcing the economy into a more interconnected and transparent system is at least a start to real reform.
My View: Clearly, my colleagues know this world better than I do. This is a long and difficult road India has started down and I wish it the best.
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