Demonetization Effects on Banking, Real Estate, Auto, FMCG Industry

One month is gone after the biggest financial reform in the history of India – demonetization was implemented. The move on ban of Rs. 500 & 1000 currency note was appreciated across India especially by urbanites. However rural region is still facing the cash crunch due to poor access to banking and this is estimated to impact various industrial sectors in the coming 2-3 quarters.

Although there are many benefits of reducing cash in the system and increasing the usage of digital money in the long run but the consequences of cash crunch from the system are very difficult to comprehend as the economic growth remains uncertain. But one thing is very clear the no-cash scenario will impact the Indian economy in the near term.

Check out the results of official survey on currency ban.

Let’s understand the effects of currency ban on key industrial sector of India:

Automotive: The 2 & 4 wheeler and commercial sector is expected to get negatively impacted for minimum 2-3 quarters. This is because, in India high share of purchase of motorcycle takes place through pure cash which is nearly (30%-35%) in rural area. In comparison, the demand for small car is less likely to get affected, since people mostly buy 4 wheelers through loans. However as per report published, the number of inquiries have not lowered. Which means the industry will pick up its momentum in the coming months.

Banking and NBFCs: This includes public and private sector banks, NBFCs – consumer finance, consumer vehicle, and mortgage. In the short term, this sector is likely to face slowdown in credit growth in auto, commercial vehicle, loan against property, personal loan, and SME loans.

There will be increase in savings and term deposits in the medium term as a large part of the informal and cash based economy will shift to the banking system for savings and transactions. NBFCs are the oxygen for the small and medium businesses. But due to cash crunch, there could be rise in loan defaults.

Real estate: This industry was already facing difficulties due to poor sale of flats, houses, etc. due to high prices. But post demonetization, things are going to get worsen and it is the worst impacted sector due to the currency ban. Residential real estate demand will slow down as potential buyers especially from the salaried class are very likely to stay away from purchase decisions as they are expecting reduction in real estate prices and most importantly the interest rate charged by the banks. The main reason for the negative impact is the transactions which used to happen in cash has taken a hit. Moreover the sector was not transparent.


Many people’s wealth has taken a hit post demonetization and this has directly affected their future income. This is straight away going to depress the real estate market.

Check latest updates on demonetization.

Construction, building materials and paints: Majority of this sector which directly relies on real estate will suffer as transactions happen through cash only. Since demand for new construction will slow down, it will also impact these sectors.

Consumer products: This includes electronic items such as mobile phone, television, washing machine, etc. Due to low cash flow in the whole system, companies will extend the credit to the distribution chain. Companies are launching various discounts, freebies, waiving off the processing fees in order to woo the customers.

FMCG: Excellent monsoon this year had bought good news to the FMCG sector. However demonetization came as a dampener to this industry. Rural sales had started to pick up after the monsoon. But as rural area majorly relies on cash transactions and wholesale trading, the cash crunch resulted in weaker sales and this is expected to continue for the first two quarters of the next financial year. Sales at wholesalers and local kirana stores has also taken a hit. However as the circulation of money increases FMCG will see sales picking up.

One thing is now very obvious. There will be an impact on each one of us finances and investments. Although there are other external factors mainly the US election result and its impact on the global economy, which might worsen the condition for a short term. However in the long run, Indian economy is definitely going to blossom.

Read more on the lessons to be learnt from demonetization.

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