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Great Heist of India 2016

Posted in Cryptos

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Introduction

fintekneeks_rupees

I went into Wells Fargo yesterday, carrying my Indian Rupees. I had gotten them from a business trip years ago and never bothered to exchange them upon my return. Going up to the teller, I started to speak, “I have these Indian Rupees…” Before I could even finish, the teller looked down at the currency, and looked up with pity in her eyes, shaking her head. “We don’t accept these. Sorry,” she said. With sad music in the background, I lowered my head and walked out without hope. Now in my possession are 3 worthless bills of ₹500 Rupees, about $22 US dollars. The Indian government just took $22 from me.

Official Declaration on November 8

Last week, India has made its ₹500 and ₹1000 Rupees notes (INR) worthless by outlawing them, making them illegal for use. So unusual is the fact that Prime Minister Modi declared these notes useless immediately, without any transition period for people to start circulating new replacement banknotes. The new ₹500 and ₹2000 INR notes was circulated two days later. Later on, newly designed ₹1000 INR notes will come into circulation.

The provided reasons for this drastic move was to combat “black money”, corruption, and counterfeiting. What it caused was chaos, frustration, and price gouging.

In October, the Royal Bank of India reduced their interest rate by 25 basis points. Also, the government has offered a four month amnesty for taxpayers to declare hidden assets and income, which ended in October and brought in about $10B USD (~₹650B). This is small considering the GDP of India is over $2T USD. About 1% of the population pays income tax in India. With over 1.2 billion people in India, this percentage seems very small to me. I would have to assume that the 1% who pay taxes tend to be working in corporate jobs or make significant amount of income. While the rest of the economy is conducted by small business owners who tend to deal mainly in cash.

Interestingly, this comes right after the amnesty period has ended. I would have to assume the amnesty was a disappointment and the move was to force people to deposit their cash on hand into the banking system. Then they can track to see who filed taxes and start questioning those with large deposits not previously declared.

The security features on the ₹500 note seem pretty significant. A security stripe, several watermarks, and multiple colors are on the bill. I guess for some, it is profitable to expend the energy to counterfeit these notes that are valued around $7.50 and $15 US dollars. But, I can only imagine spending time to counterfeit $100 US dollar or 500 Euro bills would be lucrative. Lot more “bang for the buck” to those counterfeiters.

I guess corrupt officials who receive bribes will have them in cash. However, I would think they have ways of getting around this or they can sell their demonetized notes at a discount.

Real Results

People living in rural areas have limited access to ATMs and banks. They will have to disrupt their daily routines to address the issue of holding onto these notes. This has caused stress on many savers. Banks have limited capacity to exchange notes to a mass influx of people. Therefore, ATMs run out of the new notes. There are long lines at the banks. Many retailers are not accepting the old notes, so people cannot buy basic necessities with the savings they had or will have to overpay for their purchases, e.g. buying things at a premium from what they used to cost. Some will not give out change and those who do may provide change at a premium, e.g. ₹400 in change for ₹500 old note. Even gold is being sold at a steep premium in Rupees compared to gold priced in US dollars.

The government is asking for patience, but if I were in the situation, I would be very frustrated. Clearly, the demand was artificially created, and the price of many goods went up for many citizens in India.

What is Next?

In our perspective, the positive is that bitcoin interest has increased in India in recent months. India will have more than 240 million people using a smartphone. There are plenty of people who are tech-savvy enough to transition some of their money into bitcoin. As governments continue to act surprisingly or recklessly to fiscal policy, bitcoin interest and price will continue to rise.

Bitcoin exchanges are selling at a premium 10-15% in Rupees compared to bitcoin sold in USD. Theoretically, one can arbitrage the premium by buying bitcoin in USD and selling them in Rupees. Even with currency conversion slippage, this may be profitable.

I will be surprised if President Mukherjee is re-elected and Prime Minister Modi keeps his appointed position in 2017. We will see how this will weigh on the voting public.

It is not difficult to imagine that this will happen in the US. The risk is very small, but evidenced by the recent elections, it is still a possibility. The US dollar is a reserve currency and is used widely all over the world, but this can change. There are many rumors that getting rid of the $100 dollar bill is beneficial among policymakers. Most likely the US government will offer a transition period if the $100 dollar bill was demonetized.

Does anybody want to buy my Rupees for $20 USD?

References

http://fortune.com/2016/11/08/narendra-modi-indian-rupee/

http://www.cnbc.com/2016/11/15/india-rupee-restriction-boost-bitcoin-digital-currency.html

http://indianexpress.com/article/india/india-news-india/data-shows-only-1-of-population-pays-income-tax-over-5000-pay-more-than-1-crore-2779065/

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