India's culling of its 2000-rupee notes is driving hoarders to realty and gold

India has witnessed a spurt in demand for gold since the Reserve Bank of India (RBI), last week, announced that the 2,000-rupee currency notes will be pulled out of circulation.

These high-value notes must be deposited in bank accounts or exchanged for other denominations by Sept. 30 (pdf), the RBI declared on May 19. It has set a deposit limit of Rs 20,000 per day starting tomorrow (May 23).

“People who have been using these notes as a store of value may face inconvenience,” Rupa Rege Nitsure, group chief economist at L&T Finance Holdings told Reuters. There is a high chance of hoarded cash returning to the banking system.

However, cash-driven sectors such as agriculture and construction, and small businesses are likely to face hiccups in the near term, economists said.

A spur in demand for gold and real estate

Policymakers have assuaged concerns similar to the ones that followed the shock demonetization of Rs 500 and Rs 1,000 currency notes in November 2016.

Yet, gold jewelry sales rose by 10-20% over the weekend, the Hindustan Times reported today. Those with unaccounted wealth are expected to fuel demand for such high-value purchases like real estate and precious metals like gold and silver, according to economists at QuantEco Research.

“Many customers made small-ticket purchases of 10-gram and 20-gram coins, whereas there were certain others who opted for 100-gram coins and bars as well. About 80% of customers have made cash payments…” Hemant Choksi, an Ahmedabad jeweler told The Times of India.

Purchase of gold, silver, jewelry, or precious gems and stones below $2,415 does not require know-your-customer documentation in India.

The use of the Rs 2,000 notes has also reportedly spiked at petrol pumps and electronic goods stores.

What prompted RBI to pull the Rs 2,000 notes?

The 2016 demonetization had sucked out 86% of the economy’s currency in circulation overnight.

The Rs 2,000 notes were introduced back then. Their withdrawal now, however, is expected to be less disruptive as the circulation of these notes has dwindled significantly over the years.

The RBI stopped printing them in 2018-19. At the end of the financial year 2023, their share in the economy’s currency note circulation stood at only 10.8%—or $44.27 billion, the RBI said.

While authorities have not specified the reasons for the move, Nitsure of L&T Finance Holdings believes it was a “wise decision” ahead of state and general elections. She noted that cash usage typically spikes at the time of elections.

India’s next general election will be held around May 2024, with a string of polls to state legislative assemblies scheduled in the preceding months.