India’s Demonetization Impacts Diamond Industry. But Is This Change For The Better?

(ehudlaniado.com) - On November 8, in a drive to fight undeclared money, corruption and counterfeiting, the Prime Minister of India, Narendra Modi, made a surprise announcement: that the country’s 500 and 1000 rupee notes of the Mahatma Gandhi Series will removed from circulation and will no longer be considered legal tender. The move sent shockwaves throughout the country and has impacted, among other sectors of the economy, the diamond industry. A surprise outcome of the demonetization move was a drop in interest rates. According to the State Bank of India, it reduced interest rates on deposits of more than one year. SBI Chairman Arundhati Bhattacharya expects that “all rates will fall” because of the large inflow of cash and the slowdown in demand for credit. The impact of cheaper lending for the diamond center in Mumbai is that diamond traders may find it easier to purchase rough. The question is will they do so, considering the drop in demand. The impact on other business activities is not yet clear. The Reserve Bank of India estimates that some 3 trillion rupees ($44 billion) will be taken out of India’s economy, as many holding undeclared bank notes cannot find a solution for their illegal cash. This will lead to a large contraction of the economy. From our perspective, any change that helps improve an economy is welcome. I can only hope that the demonetization will not disable the Indian diamond center, but will instead help it to reduce bank lending, decrease rough purchases as the consumer market cools, and generally find a path to healthier trading.