Demonetisation: Expected Currency Replacement by Feb 2017 - Chart Of The Day 20 December 2016 - Equitymaster

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Demonetisation: Expected Currency Replacement by Feb 2017
Dec 20, 2016

The demonetisation has left a lot of questions unanswered. Everyday there is something new that is brought into the public domain.

Earlier, the question uppermost in everybody's mind was - 'The impact of demonetisation on the economy'.

That said, with a goof up in implementation, the key question has changed. It is - 'When will things go back to normal'.

Vivek Kaul, at the beginning mentioned that the cash shortage situation to return to normalcy would require around six months..

However, if SBI is to be believed, normalcy would return by the end of February 2017.

The current strain on liquidity is due to two reasons. First, bottlenecks in printing notes. Second, unavailability of Rs 500 notes.

The unavailability of Rs 500 notes has led to a big gap between the highest (Rs 2000) and next highest (Rs 100) denomination currency notes. It means Rs 2000 notes are more of a store of value item.

Result: The printed currency is also facing problem in circulation.

Now, if SBI's research statements are to be believed, the printing of Rs 500 has speed up. And in the best case scenario the situation will be back normal by the end of February 2017.

The three scenarios on the idea of aggressive printing of Rs 500 notes:

  • If during December-February only Rs 500 Notes are printed - 98%
  • If during December- January only Rs 500 notes are printed and in Feb 50% of notes are printed in Rs 500 and rest all in small denomination - 88%
  • If during December- January only Rs 500 notes are printed and in February only small denomination notes are printed - 78%

Even we take the worst case scenario, 78% replacement will be more than the current expectation. If it pans out this way, it would be a big relief for Microfinance sector.

As discussed above, cash is both the raw material and finished goods for these Institutions. This can act as a catalyst in the recovery of the sector.

Data Source: SBI Ecowrap, RBI

Note: Scenario 1: Only Rs 500 notes are printed; Scenario 2: Smaller percentage of low value notes are printed; Scenario 3: Higher percentage of low value notes are printed;

This Chart Of The Day was published in The 5 Minute WrapUp - This Sector Will Rise Like a Phoenix from the Ashes of Demonetisation

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