Indian Prime Minister Announces Effective Midnight November 8, 500 and 1000 Rupee Notes Will Be Withdrawn From the Financial System.
₹500 and ₹1000 Notes Cease to be Legal Tender at Midnight November 8, 2016
Indian ₹500 and ₹1000 Notes to Be Deposited by end of December, or Become Worthless.
The government will issue new ₹500 and ₹2,000 rupee denomination to replace the ₹500 and ₹1000 notes, thus eliminating the ₹1000 note.
Corruption/Tax Evasion Cited as Reason for Action
India Joins War on Cash
According to the Economic Times of India the Prime Minister addressed the nation last night in a televised speech declaring:
” ₹500 and ₹1000 notes will no longer be legal tender as of midnight tonight, [thereafter] they will be worthless pieces of paper. You have fifty days to deposit these notes in any Post Office or Bank.”*
The Prime Minister added “no need to panic”
₹500 and ₹1000 notes are worth about $7.50 and $15 respectively. The government will issue new ₹500 and ₹2,000 rupee denomination to replace them.
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The Difference Between the War on Gold and the War on Cash
Governments can debase their currencies and even unilaterally declare them worthless as India did today. Governments, however, can not declare gold worthless. They may trash talk it, ban it or confiscate it, but they can not unilaterally declare it of no value.
The 500 and 1000 Rupee notes with no longer be legal tender as of midnight November 8. Smaller denominated notes will remain legal tender.
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Here is some background on India’s war on gold:
India’s War On Gold
Import Duties
A ten percent duty on gold since 2013
Despite increased demand, Indian gold imports have been hampered by government action. India has placed import duties on gold in order to slow the amount of gold coming into the country. The government’s stated reason for curbing gold imports is that it throws off their balance of trade with imports exceeding exports due to large gold imports.
India has no significant gold mines, so the country’s entire gold demand has to be met either from gold already in the country or by imports. Efforts to get India’s gold mining industry going have met with lots of red tape and very little production. An Australian Indian venture was recently announced that aims to restart an old gold mine that might provide India with a few tons of domestic supply.
Gold Monetization Scheme
The government hopes not only to stop gold from coming into India, but to get Indians to turn their gold in to the government in exchange for interest bearing bonds. The scheme launched in late 2015 so far has yielded little gold from Indian citizens. A couple of temples in India have, however, agreed to turn some of their gold in for the interest bearing bonds. For more on India’s gold monetization scheme click here.
Sales Tax
Earlier this year the Indian government imposed a 1% sales tax on gold that immediately prompted jewelers across the country to go on strike. As of mid April, half of India’s jewerly stores were closed even though the strike was called off. The Indian government has refused thus far to lift the 1% tax. Rather, earlier this month, the Indian government exempted smaller jewelers from the 1% tax.
Additional Duty on Indians Returning From Abroad
In April 2016, the Indian government imposed an additional 15% duty on gold and silver for Indians returning home after one year abroad.
*the fifty day exchange period will certainly cause many Indians living abroad holding rupees to lose their value as many may not be able to return to India to exchange their rupees during that time period.
Further Reading
Royal Bank of India sees no disruption in the removal of “high value” notes
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