NEW DELHI: India withdrawing its
highest value currency notes from circulation may push some consumers to buy precious metals and real estate, giving a temporary boost to Asia’s third-largest economy.
In a bid to quickly spend the
2,000 rupee ($24) notes that will be withdrawn over the next four months, Indians could snap up gold, properties and household items like air conditioners and refrigerators, according to economists. This is in contrast to the 2016 exercise, which removed almost all cash from circulation and led to long queues outside banks and automated teller machines.
“It is expected to help growth a bit because consumption is expected to go up,” Ankita Pathak, an economist at DSP Investment Managers, said in an interview with Bloomberg Television Monday. “But overall if we look at the macro environment, it is more likely to be driven by fundamental factors.”
The Reserve Bank of India late on Friday gave citizens until Sept. 30 to deposit the 2,000 rupee notes into a bank or exchange them for other denominations, citing a “clean note policy.” Governor Shaktikanta Das reiterated the stance on Monday, saying the move was part of the central bank’s currency management drive.
“There was a reluctance to accept 2,000 rupee notes always,” Das told reporters in New Delhi. “Maybe, after the notification, the reluctance has increased.”
Some 10.8% of the notes will be take out of circulation, unlike the earlier demonetization exercise which removed 86% of the currency from the system.
“With the bank note remaining a legal tender, unlike demonetization, consumption could see a boost,” Kotak Mahindra Bank economists, led by Suvodeep Rakshit, wrote in a report. “Notes which are not deposited by individuals could move to high-value spends such as gold/jewelry, high-end consumer durables, and real estate.”
Local media reported instances of panic buying in jewelery stores in the capital New Delhi over the weekend, with jewelers quoting higher prices for gold. Late deliveries of the precious metal are now expected because of the backlog in orders.
People’s reluctance to disclose their cash holding may lead to an “initial surge in conspicuous spending,” said Samiran Chakraborty, economist with Standard Chartered Bank.
News of the rupee note ban came hours after the RBI declared a bumper dividend to the government, which could further add to liquidity in India. It “could add a temporary punch to the already improving macro outlook and sentiments,” wrote HSBC Holdings Plc economists Pranjul Bhandari and Aayushi Chaudhary.
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