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Impact of Demonetisation on Commodities and Currency Market

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Published Date: 09 Jun 2020Updated Date: 17 Jan 20256 mins readBy MOFSL
Impact of Demonetisation

Some of the jewellery showrooms and bullion traders at the famous Zaveri Bazar in Mumbai have kept their shops and offices open throughout the night of Nov. 8th 2016 which saw a sudden jump in demand for gold bullion and ornaments and no one had any clue what should be the price of gold at such a situation, this was not due to any other reason but for the prime minister’s announcement regarding withdrawal of ?500 and ?1000 notes from being legal tender, the rush caused the gold prices allegedly quoting at over ?50,000/10gms whereas the exchange traded gold futures were close to ?30,000/10gms. Despite the higher price most of the gold which was available at that point of time has changed hands at various premiums and there were reports that some shops were swept clean of their jewellery pieces overnight. At the same time some of the large traders rushed to cover their short positions on derivative contracts which they took in illegal ‘dabba’ markets, but were turned down as the operations at all ‘dabba’ operators have come to a sudden halt. The entire action which took place in that single night has been unprecedented and will have a long lasting effect of gold market in India. The gold premiums have come-off gradually and currently close to nil, but the demand for gold as an investment and even for jewellery has collapsed due to two major reasons the first is most of the urban demand for bullion has been met with the instant demand for bullion who wanted to buy gold in exchange of their old currency notes, secondly the entire rural India which accounts for the lion’s share of jewellery demand has been grappling with cash crunch. We do not see this situation is going to change any time soon, but shall have a lasting impact on how people will see gold in future.

On the other side in the crucial agrarian economy of rural India has been shaken by the event and most of the Mandis remained shut for few days. Since them most of them tried to get back to normalcy but still the activities in most of the Mandis are lower by 30-35% from seasonal averages despite a higher output this year in many crops. On the commodities futures market where most of the participants in farm commodity futures are from upcountry and rural areas they have seen a significant erosion of interest and almost all the commodities are still struggling to get to even half of volumes what they were been traded at before demonetization. The mandis will certainly take a bit longer to return to normalcy as the arrivals slowed down due to the farmers’ focus shifting to sowing for Rabi crop, but as we enter in to January we expect the arrivals for kharif crops should increase.

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