Impact of scraping of Rs 500 and Rs 1000 notes on Real Estate and Banking!

The whole nation was taken aback by the bold and unprecedented step. November 8, 2016 night was a nightmare for black money hoarders. From 2011 to 2016 total number of bank notes rose by 40% while Rs 500 notes and Rs 1000 notes rose by 76% and 109% respectively.

Nov 09, 2016 10:11 IST IIFL Abhimanyu Sofat |

The whole nation is applauding PM Narendra Modi for scraping old Rs 500 and Rs 1000 notes from the mid-night of November 8, 2016. This bold and unprecendented step took the nation by suprise and became a nightmare for black money hoarders. From 2011 to 2016, total number of bank notes rose by 40% while Rs 500 notes and Rs 1000 notes rose by 76% and 109% respectively. As of March 2016, ~86% of the value of money in circulation was in Rs.500 and Rs 1000 notes. This signifies that Rs 500 and Rs 1000 notes are more in circulation and are being used by black money hoarders.
Bank notes in circulation (Mar-16)
Denomination (Rs.) Value (Rs. Billion) % share of total
1, 2 and 5 52 0.3%
10 320 1.9%
20 98 0.6%
50 194 1.2%
100 1578 9.6%
500 7854 47.8%
1000 6326 38.5%
Total 16422
 
This move will significantly impact the Indian economy as the parallel economy will shrink drastically. This will increase tax collection of the government. However, it is too early to quantify the tax collections. In addition, the growth rate of Indian GDP will rise as more and more money will circulate in the economy through banks.
 
All sectors will get impacted - directly or indirectly. However, it is clear that there will be significant direct impact on real estate sector and banking sector.
 
Nightmare for real estate

The real estate sector account for ~11% of the GDP and most of the transactions happen in unaccounted cash. The parallel economy (Black money) has increased the real estate prices in India. By scraping Rs 500 and Rs 1000 notes, significant amount of the black money got wiped out from the economy. Therefore, it will create pressure on the property prices in short-term as the cash transaction will drastically reduce. The real estate sector is already facing muted growth.
 
Most of the real estate companies opened 20% down as soon as bourses opened today morning.
Company Name Last Price (Rs.) % Chg
1 Indiabulls Real 66 -18.01
2 DLF 120 -16.46
3 HDIL 62.3 -16.32
4 Oberoi Realty 304 -10.09
5 Sobha 257 -4.94
6 Prestige Estate 176 -3.83
7 Godrej Prop 352 -1.81
8 Omaxe 163 -1.72
9 PNC Infratech 119.2 2.67
10 Phoenix Mills 375 3.15
Note: Closing price as on November 09, 2016
 
But in long-term this step will do good for real estate sector as it will increase transparency in this sector. The top-line will also improve since unaccounted-cash will get curbed.
 
Good news for banks

On the other hand, banks will be the biggest beneficiaries of this policy. The circulation of money through banking channel will increase as people will now prefer to transact through banks. The CASA will also rise in few months despite the deposits of old notes by public and restriction on the withdrawals. The heavy deposits by public will further increase the liquidity in the banking system and could force banks to lower the deposit interest rates. In addition, the lower money circulation in the market will also put pressure on inflation which will further give room to RBI to cut the interest rates.
 
Short-term trouble for consumer durables

The move will also impact the consumptions stocks as the restriction on withdrawals from the bank accounts will impact the demand. People will prefer to buy only essential items for the next 1-2 month till the government remove the imposed restriction on withdrawals.
 
In nutshell, it is a good news for common-man but a nightmare for black money hoarders. 

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