Reaction on Stock Market, Exchange Rate, oil-Price and Trade: Evidence from India’s Demonetization

Effects of India's Demonetization Policy on Stock Market, Exchange Rate, Oil Price, and Trade

Abstract

We analyzed the effects of India’s demonetization policy which made the currency notes of Rs. 500 and 1000 denomination illegal in the circulation from the intervening night of 08-09 November 2016. The cross-sectional causality was investigated for the duration of October 2016 - November 2017 on various parameters such as (i) the overall fluctuations in the Bombay Stock Exchange (BSE) market, (ii) exchange rate of currencies such as US Dollar, British pounds, Euro and Japanese Yen, (iii) the share prices of six major Indian oil companies including Reliance Industries Limited (RIL), Gas authority India Limited (GAIL), Hindustan Petroleum Corporation Limited (HPCL), Indian Oil Corporation Limited (IOCL), and Oil and Natural Gas Corporation (ONGC), (iv) total import export of oil and non-oil commodities, and (v) finally the cash money in circulation, left with banks and with public. It was found that post-demonetization, the BSE Sensex nose-dived to almost 1500 points and remains constant until December 2016 and then started increasing. The closing share-price value of all six major oil-marketing companies didn’t change much which was further corroborated from the total export and imports statics of oil (Rs. in crores) for the same duration of study. However, a significant difference was observed in import and export of non-oil commodities between pre- and post-demonetization period. During post-demonetization era, the cash money in circulation and cash money left with public was found significantly low while sharp increased deposit in PSBs was observed as public was flooded to deposit old currency notes but could not withdraw new currency notes due to paucity.