Indian jeweller Bachhraj Bamalwa’s phone hasn’t stopped ringing since Prime Minister Narendra Modi announced on national television that high-denomination bills will be withdrawn from yesterday as the government cracks down on corruption.
Five hundred rupee ($7.5) and 1,000 rupee notes ceased to be legal tender from yesterday, Modi said in an unscheduled address to the nation. With bullion usually purchased in cash in India, the announcement led to a frenzy among people wanting to convert their cash hoard into gold. That spurred some wholesalers to boost prices by as much as 23%, said Kumar Jain, owner of UT Zaveri jewellery store in Mumbai.
Demand in the second-largest bullion consumer will dry up soon as the cash supply dwindles, said Bamalwa, who’s also a director with the All India Gems & Jewellery Trade Federation. Modi’s move will hit jewellery purchases further in the next few months. Elevated prices and India’s push for more transparency on purchases and income disclosure will cut demand in 2016 to its lowest in seven years, the World Gold Council said on Tuesday.
The immediate effect may be a very short-term splurge of spending on gold jewellery and other high value articles as individuals seek to offload the soon-to-be obsolete notes, said Tom Kendall, head of precious metals strategy at ICBC Standard Bank, in a report on Tuesday. “This latest effort to crack down on the informal sector may be helpful in squeezing out undeclared gold flows.”
Some shops were open until midnight in Mumbai’s biggest bullion market, Zaveri Bazaar, seeking to tap demand, said Ketan Shroff, spokesman for the India Bullion & Jewellers Association Ltd. “After that jewellers might have to go on a holiday as no cash sales will happen.”
The government should have circulated the new notes before discontinuing the old ones as it will be tough for jewellers in the coming months until liquidity improves, said Shroff. India’s mainly unorganised jewellery market undertakes transactions mostly in cash as rural India, which makes up nearly 60% of the total demand has limited access to the banking system and rarely uses credit and debit cards for purchases.
In the Zaveri Bazaar yesterday, jewellers sent back customers rushing to convert their cash into gold. Worried looking clients carrying backpacks and laptop bags were asked to return once the dust settled in a couple of days with one jeweller telling a customer to donate his money to charity or temples, while declining his pleas to sell him jewellery.
Jewellers phones kept ringing off the hooks and there was a steady stream of people inquiring about sales and what to do with their money. Anil Jain, owner of R Pukraj & Co, said he was up answering calls till 3 am. “Everyone is worried about their money.”
Shares of jewellers plunged the most in over three years in Mumbai yesterday. Titan Co Ltd dropped as much as 15%, Gitanjali Gems Ltd plunged as much as 20%, and Tribhovandas Bhimji Zaveri Ltd slumped as much as 19.4%. Gold futures in Mumbai jumped as much as 5% after Donald Trump was elected President of the US.
The step by Modi, who is approaching the half-way mark of his term, is an attempt to fulfil his election promise of curbing tax evasion and recovering illegal income, locally known as black money. The move led to chaos across Indian cities as people lined up outside cash dispensing machines and fuel pumps.
“People are here because of the government’s decision - there is definitely panic,” said Anil Prasad, a supervisor at the Batra fuel pump in New Delhi. In Thane, near Mumbai, a fuel pump stopped selling diesel to avoid further chaos, said Mukesh Manik, a pump attendant.
The notes in circulation will have to be deposited in banks by the end of December, Modi said in a late evening speech. This is the first time since 1978 the government has withdrawn money from circulation, according to the central bank’s website.
“Misuse of cash has led to an artificial increase in property, land prices,” Modi said. “This step will strengthen the fight against corruption.” The S&P BSE Sensex tumbled as much as 6.1% before trading 1.2% lower at 3:16 pm in Mumbai. A gauge of real-estate shares sank as much as 17% after the government clamped down on black money. -With assistance from Rajhkumar K Shaaw.