Graduation Year

2018

Date of Submission

4-2018

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Cameron Shelton

Abstract

On the 8th of November, 2016, Prime Minister Modi declared all Rs. 500 and Rs. 1000 notes in circulation, constituting 86% of the currency, to be illegal tender for transactions. All the currency had to be deposited into bank accounts, and new notes would be issued. Amounts deposited over Rs. 250,000 (approx. USD 4000) would face tax scrutiny. The reasoning given for this was to curb corruption, terrorism financing and counterfeiting. This led to a scramble in the economy, giving rise to many dubious schemes for evading the consequences of this policy. There was a significant loss in income for people, however, they were willing to bear the short term pain, in the promise of medium to long term gain. Economists and political thinkers are divided on the merits of this matter. We tested the varied effect of demonetization on the Indian economy by examining the returns of the National Stock Exchange using the Event Study Methodology in the immediate period following demonetization. We found a statistically significant decline in consumption sectors. This was largely driven by decline in the ability to spend. Public Sector Banks (PSBs) saw huge positive abnormal returns, while the Private Banks recorded a lagged negative effect. This may be because the PSBs were riddled with NPAs and in dire need of liquidity, or because of the market’s differentiated perception of corruption within these portfolios. We also find State-Owned Companies to benefit from the announcement.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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