Post demonetisation, exciting, challenging times ahead

Indian banks are, therefore, getting awash with money. After all, Rs 12 lakh crore (15-3) is not small change. Even accounting for the fact that some part of this Rs 12 lakh crore will be withdrawn by the public, the gut feeling is that a good part will remain undrawn. Consequently, banks will sit on a cash pile. This will lead to a neat fall in interest rates for deposits placed with the bank unless there are directions to the contrary. 

Historically, it’s the renter class, such as the retired people and senior citizens, which parks its money in bank deposits. With rates falling, this will hurt them. A lot of them depend on deposit income.

With money squeezed, Economics 101 tells us that inflation will fall. 

Whether it would fall in the areas that matter most, namely, food, clothing, shelter, transportation, and medicine, is doubtful. If these prices do fall, the average citizen is protected. Otherwise, his pocket will get badly burnt. There is an expectation that banks’ lending rates will also come down. 

This will bring down the cost of production and will benefit both domestic and export markets if manufacturers pass on the benefit to consumers. 

A logical fallout of dropping investment interest rates is that the charm of fixed interest investments will evaporate. History records that when this happens, investors take their money to the stock market or to risky investments to make good the shortfall. That, in the context of the nature of our investors, will be tragic. 

There is some talk about property prices falling. So far as residential high-rises go, these are paid by cheque or bank loans and aren’t driven by black money. But that’s not so for land. Hence land prices could come down. Construction costs could fall if input costs decelerate.

A final thought. If India sees action on black money holders as a logical aftermath of the great money switch and if the government puts the squeeze on property (like asking every property to be linked to an Aadhaar number) we will see a dramatic change in the rules by which the property market is played.

While we may not know which way the cookie crumbles, one thing is certain. We are in for uncertain and exciting times!