Impact of Demonetization on the Indian Stock Market

Abstract

Demonetization is the act of eradicating a currency unit from circulation. Indian economy witnessed this on 8 November 2017 when Prime Minister Narendra Modi announced that the two highest denomination currency notes, that is, ₹500 and ₹1,000 ceased to be legal tender. As most of the transactions in the country are based on cash only, the announcement resulted into huge hue and cry nationwide. It was estimated that approximately 86 per cent of cash was washed off from circulation. The currency notes that were rendered invalid were replaced by the new currency notes of ₹500 and ₹2,000 later. The article intends to investigate the impact of demonetization on the Bombay Stock Exchange (BSE). An event study methodology has been used to analyse the impact of the announcement on its most important index—S&P (Standard & Poor’s) BSE SENSEX index and the 30 top trading stocks which comprise S&P BSE SENSEX. The study period is divided into pre- and post-demonetization announcement. The empirical results indicate that there was no striking impact of the demonetization announcement on the stock returns during the period of the study.