Currexit indeed makes sense now

The government may have sown seeds of financial reforms via crackdown on black money with this latest move to denotify some currency notes. Financial experts and bankers are hailing the move and call it a perfect extension of steps taken earlier.  With the launch of the Jan Dhan Yojana, emergence of the Black money act, the amnesty Scheme and now this, the pattern seems to have logic in place. The government has put together ways to bring small money holders into the fold through Rupay, Jan Dhan and other schemes and is seen weeding out big money launders by piercing through black money.

“Join the dots in terms of what the government has been doing... and make GST another spoke in the wheel, it all seems well thought out.” says Rajiv Anand, executive director, Axis Bank, who has of late become a whiz on fintech and done tremendous groundwork in the business on technology and banking. Putting payments through the official channels will certainly test the online systems we have in place and will also prepare India to use them in a massive way. “We have built out a lot of a robust mechanism in India – national payments system, the wallet companies and of course debit and credit cards. We need to realize and be a less cash society going forward.”

Interest Rates: There have been quick conclusions that refreshing of currency and black money crackdown will lower interest rates. What’s the logic at play? “You are certainly going to see a surge in deposits and that will bring cost of funds down. Over a period of time, deposit rates will come down and eventually lending rates will too.” Anand explains what we are going to see is nearly as much as 14 lakh crore (which is near about the total 500 and 1000 rupee notes available in the system) will shake up and find a way to the official systems.

Fiscal Control: Another insight from Anand is that how this move may also help the fiscal deficit. If any amount of money that’s unaccounted for is not returned to the system (Rs 500 and Rs 1000 notes chucked or burnt or never returned to banks), the RBI’s liability reduces vis-a-vis the money that was brought into circulation in the first place. This, Anand says, could effectively mean the RBI makes a profit and finds itself better positioned to give the government an improved dividend. This may help the fiscal situation, he concludes.

Impact On Banks: Banks will see more thrust on digital payments and an adoption of such payments by merchants will help too. Essentiailly, we may see a situation that discourages cash out of a bank, by using transactions.

“Deposit growth is good for us, increased digital transactions are good too because we will therefore not have to bear the cost of managing cash. Net-net, its all positive,” says Anand.

The writer is an award-winning business journalist and founder of www.golfingindian.com