Indian markets likely to welcome withdrawal of Rs 500, Rs 1000 denomination currency notes

Indian markets are likely to welcome the country's move to kill off its 500 and 1,000 rupee banknotes on Wednesday - the US presidential election result notwithstanding - as banks' coffers will fill up as people deposit the notes as part of the process.

Analysts also see the move as leading to a softening in inflation.

The surprise step is designed to bring billions of dollars worth of cash in unaccounted wealth into the mainstream economy, as well as dent the finances of Islamist militants who target India and are suspected of using fake 500 rupee notes to fund operations.

Indian Prime Minister Narendra Modi said 500 and 1,000 rupee notes would be withdrawn from circulation starting from midnight, saying it was part of a crackdown on rampant corruption and counterfeit currency.

Real estate firm's shares such as DLF Ltd are likely to be hit in the near-term given the action could curb property prices, though it will eventually boost demand for housing over the longer-term.

Black money has long been suspected of being steered into real estate, inflating prices.

Any broader market gains could be tempered should Republican candidate Donald Trump win the US election on Tuesday, an outcome that market investors have warned could lead to sell-offs due to doubts about his policies. The results of the election should start filtering through as Indian markets open on Wednesday.

The head of the Reserve Bank of India, Urjit Patel, said he saw no impact on liquidity in the wholesale market and that the bank had ramped up production of the new series of notes over the last few months.

"If you look at India's economy point of view it's a very good measure," said Saravana Kumar, chief investment officer, LIC Mutual Fund.

Traders said bank shares would likely be the main beneficiaries as Indians hand in their bigger notes, thereby improving their near-term liquidity.

Cash positions will ease, however, as India issues new 500 rupee bills as well as higher-denomination 2,000 rupee bills to replace the retired ones.

Analysts said that the move could also lead to easing inflation as the government's push against black money is likely to push transactions into the formal economy, leading to more transparency. The exact impact would be difficult to gauge given uncertainty over the scale of illicit funds, they said.

The Reserve Bank of India unexpectedly cut the repo lending rate last month citing easing inflation, and it is seen as potentially lowering it again early next year should growth in retail prices continue to ease.

The prime minister announced a 50-day window from November 10 to December 30 for those having these notes to deposit them in their bank and post office accounts "without any limit".

He also said that new notes of Rs 2000 and Rs 500, with completely new design, will be introduced. Officials said such notes have already been reached to banks to prepare for their circulation from November 10.

"Based on past experience, the RBI will hereafter make arrangements to limit the share of high denomination notes in the total currency in circulation," Modi said.

Banks will remain closed tomorrow and ATMs will also not function tomorrow and in some places on November 10 also.

In the first few days, there will be a withdrawal limit of Rs 2000 per day per ATM card. This will be raised to Rs 4000 later.

Similarly, keeping in mind the supply of new notes, in the first few days, there will be a limit of Rs 10,000 per day and Rs 20,000 per week. This limit will be increased in the coming days.

Banks will open additional counters and work for additional hours to deal with the rush of people wanting to deposit or change notes.

Officials said there were 6.7 billion pieces of Rs 1,000 notes in circulation and 16.5 billion pieces of Rs 500.

"There comes a time in the history of a country's development when a need is felt for a strong and decisive step," he said, asking political parties, all governments, social organisations and media to participate in the war against black money "with enthusiasm to make it a success".

He conceded that there could some inconvenience to people in implementing the measures and asked them to bear with it.

Modi's ruling Bharatiya Janata Party came into power in 2014 promising to bring black market money into the regular financial system, but critics said it had failed, with government data showing the cash economy outpacing the formal economy.

Caught by surprise

Some officials and experts said Tuesday's move was the biggest in decades aimed at fighting graft.

The head of a state-run bank said it was not fully prepared for the change.

"This is news for us also. I'm not aware how much stock we have in our chest. The Reserve Bank will have to provide us with required cash to meet the demand. The demand will be very high no doubt," said the bank chief, who did not want to be named as he was still awaiting details.

Government data show circulation of current notes has outpaced the expansion in India's economy.

In the past five years, circulation of all currency notes grew 40 per cent, compared with 30 per cent growth in Asia's third-largest economy.

The growth in 500 and 1,000 rupee banknotes was even steeper; 500 rupee notes grew 76 percent between 2011 and 2016, while in the same period, 1,000 rupee notes rose by 109 per cent.

The head of the country's largest government-owned lender, State Bank of India, said she had just been advised about the government's decision.

"We have handled demonetisation earlier and will do so again. Tomorrow 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 chairman Arundhati Bhattacharya.

(WION with agencies)