India launches fresh restrictions on deposits of demonetized notes

Indian passengers gather on a Railway ticket counter carr
Ritesh Shukla | NurPhoto | Getty Images

The Reserve Bank of India (RBI) has introduced a fresh set of restrictions on cash deposits of demonetized notes adding to further confusion among consumers in India.

According to the new set of rules, individuals will be able to deposit bank notes above INR 5,000 ($74) only once until the official deadline of December 30. This can however only be done after an explanation to two bank officials as to why this was not deposited earlier. The deposit will then be made only after the bank officials merit it as a satisfactory explanation.

While these changes have been added to further tackle the spread of black money and corruption in the country, people have complained that this adds another layer of bureaucracy to the existing inconvenient process of exchanging bank notes and depositing cash into accounts.

The Indian Prime Minister Narendra Modi announced the radical step to demonetize the currency notes in order to tackle the rampant problem of the so-called "black money" - billions of dollars' worth of cash in unaccounted wealth and fake currency notes. The government has decided to introduce a new 500 rupee note and also introduce a higher denomination banknote of 2,000 rupees.

An Indian bank teller counts out notes as people gather inside a bank to deposit 500 and 1000 rupee notes at a bank in Amritsar on November 25, 2016.
Nadinder Nanu | AFP | Getty Images

However, ever since the announcement on November 8, thousands of people have been waiting outside banks to exchange old currency notes for new ones. While analysts and celebrities across the country have applauded this move, the crowds have been getting more and more restless with every passing day.

But the new restrictions add further pain to the suffering of those who are dependent on cash. The new guidelines also require customers to complete all transaction by December 30 as no more bank notes can be deposited after that date.

"The move will have a short-term negative impact," Kannan Venkataramani, senior portfolio manager Asian Equity at NN Investment Partners, told CNBC via email.

"The demonetized notes can be exchanged at banks, but the government has imposed daily and weekly limits. Also, with banks requiring a photo identity proof before changing money, individuals who never declared the money in the first place may find it tough to prove why they need to change larger sums. That means a portion of the population might see part of their unaccounted wealth evaporate overnight, creating a negative wealth effect."

However, the move is expected to create a gain in the longer-term as it may have a positive impact on the government's finances and help boost economic growth, Venkatramani explained.

The new guidelines also require deposits in excess of INR 5,000 to be credited only to accounts that are identified and verified by the banks through an official customer verification process that involves submission of official documents.

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