Rs 500 note

The surprise announcement by Prime Minister Narendra Modi last night that all Rs. 500 and Rs. 1000 notes would no longer be legal tender come midnight resulted in long queues at ATMs across the country right after the news. Banks and ATMs will remain closed today in order to replace the demonetised notes.

Banks and ATMs will remain closed today in order to replace the demonetised notes.

Banks are under pressure to hurry the process of replacement to ensure a smooth transition, they remain confident that they will be able to do so.  “We have handled demonetisation earlier and will do so again. (On Wednesday), banks will remain closed in order to withdraw these notes from counters and ATMs. We will strive to restock ATMs at the earliest and make them operational”, said Arundhati Bhattacharya, Chairman of the State Bank of India.

The last time demonetisation took place in India was under Prime Minister Morarji Desai in 1978 when 5,000 and 10,000 rupee notes were terminated.

This latest move by the government has elicited a largely positive response from the public, bankers and economists. According to the The Indian Express, ICICI Bank Chief Chanda Kochhar said, “It’s perhaps the most significant move ever taken to curtail the parallel economy. It will give a sharp boost to all formal channels of payments which in turn will help the formal economy to grow at a faster clip in the long term.”

However, among the praise and support for the government, there are those who dissent. “For those who diligently pay tax, demonetisation will be an administrative nightmare. The efficacy of demonetisation in flushing out illegal wealth is at its highest when it comes as a surprise reckon economists. But then it also causes the maximum hardship on law abiding citizens and economic agents, especially small economic units”, writes Economic Times’ Hema Ramakrishnan.

The fact that India remains a cash-intensive economy, and that a major portion of rural India is still unbanked is used as an argument against demonetisation. There is also concern over what NRIs who will be returning to the country after the Dec. 30 deadline will do with their now-defunct 500 and 1,000 rupee notes.