In a surprise move, Indian Prime Minister Narendra Modi announced that the country is taking all existing 500 and 1,000 rupee notes out of circulation.
He said in a televised speech that voiding the country’s highest-denomination bills is aimed at cracking down on the black market and getting counterfeit cash out of the financial system. The black market boosts corruption and is used to fund terrorism, he said.
“There comes a time in the history of a country’s development when a need is felt for a strong and decisive step,” Modi said. “For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race toward development.”
According to the BBC, this “is seen as the boldest move by any Indian government to clamp down on tax evaders.” Revenue Secretary Hasmukh Adhia hailed the move, likening it to “a surgical strike on black money,” Reuters reported.
Modi told Indians they will have 50 days to deposit the old bills into bank or post office accounts, and the amount that people could withdraw would initially be limited. Within hours of the announcement, the notes were nearly useless for buying anything.
Old notes can still be used for the next three days at a select few places such as government hospitals, railway/bus/airline ticket counters, and gas stations.
The effect was immediate: “Chaos prevailed across major cities as people lined up outside cash dispensing machines following the announcement,” Bloomberg reported. After all, “most transactions in daily life are in cash and 45 percent of those are in notes in denominations of 500 rupees and over,” according to the BBC.
Five hundred rupees is worth about $7.55. The old notes will be replaced by new ones, and the reserve bank previewed the new design:
“Secrecy was essential for this action,” as Modi put it, and even bankers seemed genuinely surprised by the dramatic move. “This is news for us also,” one head of a state-run bank told Reuters. “I’m not aware how much stock we have in our chest.”
There are plenty of unanswered questions about how this will work. The BBC spells out some of those outstanding issues:
“Much of the government’s new initiative remains mired in confusion. It is not clear exactly what will be the effect on the money supply or whether it will take out a lot of cash in circulation.
“Likewise at this stage it seems too early to say how cash much will be locked out of the system and how successful forgers will be at catching up. No-one can say definitively whether the new notes will be harder to fake.
“It is also not clear how the banking authorities handled and planned for this huge logistical exercise which has caught so many people by surprise.”