Demonetization in India: A Study of Impact on the Money Market

This essay discusses the demonetization policy implemented in India on November 8, 2016, focusing on its impact on the money market. The policy, which invalidated 500 and 1000 rupee notes, aimed to curb corruption, bribery, and tax evasion. While causing initial disruption and public agitation, the move pushed many Indians towards digital payment methods like debit cards, bank transfers, and e-wallets. The immediate aftermath saw a sharp decline in currency within the money supply and a shift in money demand due to cash shortages. The essay references statistical data and a graph illustrating the shift in money supply and demand, ultimately concluding that demonetization has led to a long-term increase in digital transactions and a decrease in the demand for physical cash. Desklib provides access to similar solved assignments.

Demonetization in India
On 8th of November, 2016, Mr. Narendra Modi, the prime minister of India announced on live
television at 8 pm news that left the whole could try in shock. The declaration said that the
country's 500 and 1000 rupee notes shall no longer be valid come 9th November, 2016. Leaving
millions of people in awe and shock, the prime minister took some really bold steps. The strong
decision of Modi was hailed by many people, while poor were shocked by the move (Jain 10).
While people believe that this had been done in order to curb corruption, bribery and black
money in the country, economists say the same was done to avoid tax evasion.
A country with a population of around 1.3 billion was left helpless with people unable to figure
out where to hide their black money. According to statistics, only about 1% of this population
pays taxes in the country. However, after this decision of demonetizing 500 and 1000 rupee
notes, more people shall have to pay taxes. Even though this moved caused a lot of irritation and
agitation amongst the common public, most of the people do realize that this step shall have
positive implications in the long run. Through this many people in India were forced to go with
the digitization methods for making their payments that included debit cards, bank transfers and
e-wallets. (Shepard 5).
According to the money market, the economic situation in the country changed quite quickly.
The money market is basically a short term debt market that helps in dealing with different
money market instruments. A lot of the people were left with no option but to shift to more
advanced methods of cash payments and transactions such as online transfers, net-banking as
well as using debit and credit cards. It was observed at the week end of 9 December 2016, that
the currency with the public in the total money supply that further reduced to 39.1% (Srija 11).
This is accordance with RBI’s Weekly Statistical Supplement. Between the time periods from
28th October 2016 to 9th November 2016 there was a sharp decline of about 54% of the total
currency in the country which accounted for 9204.3 billion rupees. All of the old notes were no
longer valid and in great number. However, the government did not have enough new notes to
supply to the population of the country. As seen in the graph below, due to this the money supply
moved left. In response to this, the money demand shifted towards the right. This was due to the
fact that there wasn’t enough cash available to the people for them to be able to purchase things
and so the demand for money or cash increased. In the long run however, people are now using

more digital and cashless ways of spending their money make and receive payments and buy and
sell things. Therefore, in the long run, the demand for cash has decreased.
Image source: http://study.com/cimages/multimages/16/demand-decrease-shift-graph.jpg
The above graph shows how a decrease in the money supply causes the demand to shift to the
right.

Bibliography
Anonymous.20. "Money Market Definition." 23 November 2010. Economy Watch. 28 November 2017
<http://www.economywatch.com/market/money-market/money-market-definition.html>.
Jain.10, Ravi. "Indian Currency Demonetization: Advantages and Disadvantages." 7 September 2017.
Good Returns. 28 November 2017 <https://www.goodreturns.in/classroom/2016/11/indian-currency-
demonetization-advantages-disadvantages-517945.html>.
Shepard.5, Wade. "How India Is Surviving Post-Demonetization." 29 July 2017. Forbes.com. 28
November 2017 <https://www.forbes.com/sites/wadeshepard/2017/07/29/how-india-is-surviving-post-
demonetization/#132b06ca1164>.
Srija.11, Ananya. "Money Market After Demonetization." 7 January 2017. ies.gov.in. 28 November 2017
<http://www.ies.gov.in/pdfs/money_market_after_demonetisation_Jan_2017.pdf>.