Impact of demonetization on different sectors

The effect of demonetization was visible on multiple sectors in Indian market. It has
impacted few sectors very badly which involves transaction of their business in cash only.
India is one of the country which has highest currency circulation which is 12.10% of its GDP.
Total cash in hand was estimated at the time of demonetization was around $220 billion. Of
which, 87% cash was in the form of Rs. 500 and Rs. 1,000 notes worth of around Rs. 14 lakh
crore. Major impact of demonetization was seen on sectors like Banking, Automobiles, Stock
market, Transportation, FMCG industries etc.

Impact on Banking sector:

In India at the time of demonetization, banks were already facing some challenges but the
new challenges which demonetization has brought to them has shattered the banking
system. In short-term, it has disrupted the banks and banks were stressed to operate out of
fixed bank operation. Due to which bank employees has to work for extended hours in a
condition full of stress. Below mentioned are the four major influences of demonetization
on Banks-
1. Increase in Deposits: Deposits has been increased in banks after the demonetization.
All unaccounted money in the form of Rs. 500 and Rs. 1000 were flowing to the
banks and the deposit size was also increased.
2. Cost of Fund Fall: After demonetization, Bank deposits in the term of cash was
increased. PSU bank hold the lion share which is over 70% of the overall deposits,
which led to the lower cost of funds in India.
3. Government Bonds demand: Post demonetization, Banks started the lending
operations in which it lend money to the RBI under the reverse-repo option. All
major PSU banks deployed their excess funds in the form of government bonds. The
return of bond investment which is 15 to 20 percent is likely to increase the earnings
of the banks.
4. Lending Sagginess: Banks lending growth was considerably less even after the
demonetization impact. Banks reduced their interest rates to lend the money to the
needy groups, but it shrunk over the duration of demonetiation.

There are both positive as well as negative impact of demonetization on Bank operations.
Following are the positive impacts-

1. Increased deposits in the banks has increased their liquidity and profitability.
2. Improvement in digital tools used at Bank and digital bank operations has been
increased which can avoid cash loss due to theft, dacoits and some other reasons.
3. Keeping cash idle will not bring any income neither to bank nor to people, after
demonetization major part of the cash was deposited in banks which generated
income and surplus for both bank and peoples.
4. Post demonetization, Bank customers were also increased. Because people in rural
area were not having bank accounts but after demonetization they opened their
 accounts in the banks to deposit the cash which they were having in the form of Rs.
500 and Rs. 1000. This has resulted in the increased customer base for all banks.

On the other side, Demonetization has brought some issues to the banks, which are-

1. 100 percent Cash reserve requirement on incremental deposits, which indicates that
banks has not earned any interest on nearly Rs. 3 lakh crore of deposits for a
fortnight.
2. Waive off in ATM transaction charges has brought a loss of around Rs. 20 per
transaction. At the time of demonetization increased number of ATM transaction
has resulted in a huge loss to the banks.
3. Waive off in merchant discount rates has resulted a loss of around 1% discount
charges from merchants on the use of all card related transactions.
4. Banks lending activity which include retail lending has impacted, as banks were
focused on exchanging the currency at that time and they were not able to sell any
loan product.

Other effects:

1. Influence on NPA and reduced sale of SME: During demonetization SME sales has
been dropped by 50 to 80 percent and they defaulted in their instalments to the
banks. Which has impacted the banks in terms of increasing the Non performing
assets (NPAs).
2. During the demonetization, bank employees were forced to work beyond their
normal working hours which has impacted their life style due to improper work life
balance. As well as few cases were found in which few bank employees committed
suicide due to the increased work pressure and high amount of stress.

[Dr. M. Prabhu, Girish V, Mamatha R (April, 2017). Demonetization and its effect on
Banking Sector. Retrieved from IOSR Journal of Business and Management]

Impact on sectoral Indices of NSE (National Stock Exchange of India):

Though banking sector got a lot of boom due to demonetization, it has impacted all
the sectors in our economy. Where few sectors got hike and other moved in the reverse
direction. We consider NSE as the barometer of the Indian Stock market. Almost 100
percent of the derivative transaction and around 90 percent equity transaction is done on
NSE. NSE comprises of lot of indices which represents the different sectors in our economy.
Apart from nifty NSE has several sectoral indices too like energy, FMCG, Bank, Pharma,
Media, IT etc.

Data Analysis and Interpretation on NSE:

In the following analysis data has been taken for the duration Nov. 8, 2016 to June 2, 2017.
For the comparision puposes it has been divided in two parts which are- long-run and short-
run. Using which long term and short term impact on Indian stock market has been
explained. For short run analysis data has been taken up to Nov 17, 2016. By this we can see
and measure the movement of different sectoral indices and NSE in the short run and long
run.

Source: : http://ijopaar.com/files/IssueContent/D-C17205-3010.pdf

Movement in the above graph shows that the NSE Nifty levels on 8543.55 on Nov. 8, 2016 and on
Nov. 17, 2016 it comes up to the level of 8055.95. It is a sudden decrease which happens due to the
demonetization effect in India. Hence, analysis says that in short run Indian stock market went down
after the demnoetization.

Source: : http://ijopaar.com/files/IssueContent/D-C17205-3010.pdf

This graph shows the long term impact of demonetization on Indian stock market. Nifty has
moved from the level of 8543.55 on Nov. 8, 2016 to 9653.5 on June 2, 2017. Hence, analysis
of this graph depicts that Indian economy is doing well post demonetization. In short term it
didn’t performed well because whenever a big change happens people take time to adjust it.
Same ways Indian economy also took some time to reach in a stable mode again.

Sectoral Indices Performance Post Demonetization in Short Period:

 Source: : http://ijopaar.com/files/IssueContent/D-C17205-3010.pdf

This graph represents the movement of different sectoral indices of NSE, which shows how different
sectors got impacted in short and long run post demonetization. By this analysis sector wise
performance can be measured before and after the demonetization effect.

[Hemlata Tiwari & Dr. Shambhu Nath Singh (2017). Impact of Demonetization on
Sectoral Indices of NSE. Retrieved from ijopaar.com; 2017 Vol. 2(1) International
Journal of Pure and Applied Research]