Many people who have a lot of cash, legally earned, will deposit it in the bank. This will increase Bank's deposits. Banks will have more reserves at hand. Naturally this will increase the lending activity because Banks will have a good CRR (Cash Reserve Ratio) to maintain and with more deposits. Now they can do more lending.
Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.
Immediate deflation in place!
People who have illegally earned money may be afraid to deposit it in banks. There are people with crores of cash, black money, earned through illegal ways, such as corruption, smuggling etc. Now they invent for ways and means to exchange the black money with them.
Some of such people will try to deposit some money in banks, but they have to declare it as income and pay taxes on it. They will not afraid to pay taxes? They will afraid for the next question - how did they make this income in the first place? Some of them will not dare to face such questions, as that may lead to criminal action. Hence, they just waste the money stashed somewhere in Rs.500 and Rs.1000 notes.
This will reduce the total currency circulation in the economy - leading to deflation. Deflation means increase to the value of money that we have. The total money supply goes down but the commodities and things available in the market will not reduce..
If there are 100 apples and 100 coins, each apple value would be Rs.1. If there are 100 apples and only 50 coins, each apple would cost Rs.0.50 only. Now you can buy two apples for each rupee.
The inflation and deflation will balance out each other on some level at some point of time. But it is going to take some time for the inflation to happen because lending activities do not happen over night.
But deflation will happen immediately, for the next 6 months to 1 year. Gold prices will drop, stocks & commodities will drop. Everyone will get excited and congratulate the government for making this move. Then slowly, as lending activity goes up, the broad money supply will go up and prices of all things would go up, slowly and steadily.
Now no one can predict the extent and road map of the deflation and inflation. Many factors will takes place. In an ideal world, if 100% of the people who have Rs.500 and Rs.1000 notes have it as white money, then we would see only inflation. If a lot of these are black money and if many people decide to waste the money instead of depositing it, then we will have deflation in the short term. The money in higher denominations shall be Rs.16 lakhs crores. But lot of money is not in circulation. How much money will comes out is the key question to decide the deflation status.
If you see heavy deflation and heavy drop in prices, then it means there are lot of corrupt people who earned money in illegal ways, and afraid to deposit the money in banks! We may see heavy deflation in the next 6 months. If you bet on this, then buy gold, stocks of asset-heavy companies.
The fate of Real Estate!
Nevertheless the Real Estate now needs REAL money. Hence, in the short time it would crash slowly but recover quickly. In real estate, there is no index price like gold and it is decided by the market forces as per the demand-supply basis.
If you have a plot - which you have bought for 1 crore a year back, which market value of it until yesterday was 1.5 crores. You may think that the value of it would be 1.5 crores and you may not ready to sell the same for lesser price.
But if you want to sell it because you need money, you will not get a buyer immediately. Because most buyers in real estate are doing the transactions in black money. Potential buyers would tell you that they don't have 1.5 crores in white money, so they will not be able to buy it. Those who are ready to buy the same will ask you to sell the same at very less price.
With less potential buyers in the market and fewer people having white money, the demand for the land goes down and drives down its price. If you yield to sell it for 1.2 crores only, you will drive down the market price in the entire locality.
Real Estate crash will happen slowly because people will yield to the pressure slowly and start selling at lower prices because suddenly the pool of potential buyers have gone down. It is expected that the Real Estate prices would dip to lowest by end of 2017 and then start moving up again as inflation catches up.
[Disclaimer: Currencies, inflation, deflation, payments and banking issues will be decided by market forces and by ever changing government policies. If the Government allow invest the low level unaccounted money in infra, housing, government bonds, things will change. If the government decides to allow Black Money Recovery Schemes once again things will be in a different manner. Hence read the above matter likely happenings only.]
Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.
Immediate deflation in place!
People who have illegally earned money may be afraid to deposit it in banks. There are people with crores of cash, black money, earned through illegal ways, such as corruption, smuggling etc. Now they invent for ways and means to exchange the black money with them.
Some of such people will try to deposit some money in banks, but they have to declare it as income and pay taxes on it. They will not afraid to pay taxes? They will afraid for the next question - how did they make this income in the first place? Some of them will not dare to face such questions, as that may lead to criminal action. Hence, they just waste the money stashed somewhere in Rs.500 and Rs.1000 notes.
This will reduce the total currency circulation in the economy - leading to deflation. Deflation means increase to the value of money that we have. The total money supply goes down but the commodities and things available in the market will not reduce..
If there are 100 apples and 100 coins, each apple value would be Rs.1. If there are 100 apples and only 50 coins, each apple would cost Rs.0.50 only. Now you can buy two apples for each rupee.
The inflation and deflation will balance out each other on some level at some point of time. But it is going to take some time for the inflation to happen because lending activities do not happen over night.
But deflation will happen immediately, for the next 6 months to 1 year. Gold prices will drop, stocks & commodities will drop. Everyone will get excited and congratulate the government for making this move. Then slowly, as lending activity goes up, the broad money supply will go up and prices of all things would go up, slowly and steadily.
Now no one can predict the extent and road map of the deflation and inflation. Many factors will takes place. In an ideal world, if 100% of the people who have Rs.500 and Rs.1000 notes have it as white money, then we would see only inflation. If a lot of these are black money and if many people decide to waste the money instead of depositing it, then we will have deflation in the short term. The money in higher denominations shall be Rs.16 lakhs crores. But lot of money is not in circulation. How much money will comes out is the key question to decide the deflation status.
If you see heavy deflation and heavy drop in prices, then it means there are lot of corrupt people who earned money in illegal ways, and afraid to deposit the money in banks! We may see heavy deflation in the next 6 months. If you bet on this, then buy gold, stocks of asset-heavy companies.
The fate of Real Estate!
Nevertheless the Real Estate now needs REAL money. Hence, in the short time it would crash slowly but recover quickly. In real estate, there is no index price like gold and it is decided by the market forces as per the demand-supply basis.
If you have a plot - which you have bought for 1 crore a year back, which market value of it until yesterday was 1.5 crores. You may think that the value of it would be 1.5 crores and you may not ready to sell the same for lesser price.
But if you want to sell it because you need money, you will not get a buyer immediately. Because most buyers in real estate are doing the transactions in black money. Potential buyers would tell you that they don't have 1.5 crores in white money, so they will not be able to buy it. Those who are ready to buy the same will ask you to sell the same at very less price.
With less potential buyers in the market and fewer people having white money, the demand for the land goes down and drives down its price. If you yield to sell it for 1.2 crores only, you will drive down the market price in the entire locality.
Real Estate crash will happen slowly because people will yield to the pressure slowly and start selling at lower prices because suddenly the pool of potential buyers have gone down. It is expected that the Real Estate prices would dip to lowest by end of 2017 and then start moving up again as inflation catches up.
[Disclaimer: Currencies, inflation, deflation, payments and banking issues will be decided by market forces and by ever changing government policies. If the Government allow invest the low level unaccounted money in infra, housing, government bonds, things will change. If the government decides to allow Black Money Recovery Schemes once again things will be in a different manner. Hence read the above matter likely happenings only.]