Demonetization: Why India Banned 86% Of Its Rupee Notes With No Prior Notice

Demonetization. That is what the Indian government is calling the almost complete, overnight elimination of cash in one of the world’s top 10 economies and most populated countries.

But Why?

On November 8, Prime Minister Narendra Modi surprised a huge part India’s population when he announced that roughly 86 percent of the total rupee notes in circulation would suddenly become void and would need to be exchanged by new ones issued by the Reserve Bank of India. Banning the old 500 and 1,000 rupee bills will be a large step in combating tax evasion and corruption, Modi explicated, refuting reports that claimed the move was about financing terror or plain-old bribery.

While some analysts are praising the decision, people in India are quite angry — but remain peaceful — as cash shortages increase and lines to exchange the old currency get longer and longer. Take into account that India’s economy relies heavily on cash, as 90 percent of transactions are completed this way. Against this backdrop, credit or debit are not options for most people.

Cash Economics

Nonetheless, this is exactly why Modi decided to move forward with this plan. A cash economy means that only about 1 percent of the population is paying income taxes.

"The poor are sleeping peacefully, while the rich are running around trying to buy sleeping pills,” Modi said in a speech he delivered on Monday.

ETF Reactions

Top India ETFs like the Ishares MSCI India ETF INDA, the WisdomTree India Earnings Fund (ETF) EPI, the iShares S&P India Nifty 50 Index Fund INDY and the PowerShares India Portfolio (ETF) PIN were little changed on Monday trading, posting gains or losses of no more than 0.3 percent.