ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Demonetisation and Cash Shortage

Demonetisation of ₹500 and ₹1,000 notes has resulted in a cash shortage. Non-cash medium of payments may be encouraged by this shortage, but, with supplies only from the domestic currency presses, the shortage is unlikely to disappear by the end of 2016. Import of currency printed abroad may provide a solution for ending it sooner. The impact of the shortage, if it continues, will be fully felt in the last quarter of 2016–17. Its growth impact in 2016–17 could be 0.7%–1.3% depending on how much shortage continues, and for how long.

Comments by Subhomoy Bhattacharya about data source are gratefully acknowledged.

The decision of the government and the Reserve Bank of India (RBI) to withdraw the legal tender status of the preexisting 500 and 1,000 currency notes beyond 8 November 2016 and the resulting cash shortage have been matters of intense debate. The measure, according to the government, was motivated by the twin objectives of curbing the menace of fake Indian currency notes and for eliminating black money.

Interestingly, even during the two previous episodes of demonetisation of high value notes over `100 in India, on 12 January 1946, and on 16 January 1978, the objective of the exercise was containing black marketing or black money.

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