Banks closed, ATMs shut. Your Rs 500 & Rs 1000 notes are invalid. Good morning, here's the deal

The 500 and 1,000 rupee notes in your wallet are now only worth the paper they are printed on. Prime Minister Narendra Modi announced on Wednesday that banknotes of these two denominations would be withdrawn from circulation at midnight, saying it was part of a crackdown on rampant corruption and counterfeit currency.

The decision is a big blow to those who earn and stash black money and its implications run far and wide. Firstly, it renders all illicit cash in the form of these notes worthless at the end of December 30, 2016. Secondly, it immediately invalidates all fake currency floating within the country. But more importantly, it forces black money hoarders to find new and innovative way to stash the ill-gotten wealth.

"Black money and corruption are the biggest obstacles in eradicating poverty," the PM said in an address to the nation after a Cabinet meeting.

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The step is an attempt by Modi to fulfill his election promise of curbing tax evasion and recovering black money. Analysts say the timing of the move is crucial as it comes just before key state elections where parties pump in crores of rupees, often from dubious sources.

The PM also linked the decision to the fight against terrorism, saying enemies from across the border run their operations using fake currency notes. Honest citizens want this battle against corruption, black money, benami property, terrorism and counterfeiting to continue, he said.

Modi said terrorism is a frightening threat. "So many have lost their lives because of it. But have you ever thought about how these terrorists get their money? Enemies from across the border run their operations using fake currency notes. This has been going on for years. Many times, those using fake five hundred and thousand rupee notes have been caught and many such notes have been seized."

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Currently Rs 17,54,000 crore worth of notes are in circulation, according to the RBI's database. Rs 500 notes comprise almost 45 percent of this, while 39 percent of the notes were of the Rs 1,000 denomination, in value terms. In volume, Rs 10 and Rs 100 notes constituted 53 percent of the notes in circulation. Only those who have earned their money through legal means will have the courage to deposit it back into their bank accounts by the December 30, 2016 deadline.

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Expect the demand for gold and other such investment avenues such as diamonds and silver to shoot through the roof not just until the deadline, but well after that. That is, until the government finds a way to tap sale of gold across the country as well.

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The prices of property, already hitting the trough, are likely to go plummet further as nearly half of all property transactions in India are believed to be done through black money and benami transactions.

The move will set major administrative and logistical challenges in the beginning, with experts saying a series of fresh clarifications and relaxations is possible in the next few days as the step has already triggered chaos in homes and markets.

READ: Rs 500, Rs 1000 notes illegal from midnight, ATMs won't work tomorrow: PM Modi

WORLD'S BIGGEST CURRENCY DESTRUCTION SO FAR

This may be a radical step with the aim to curb black money but isn't the first such case of currency discontinuation in the world. Earlier this year, the European Central Bank said it was considering demonetization of euro 500 notes. Even in the US, there have been calls to stop fresh issuance of $100 bills for a while now. In 2010, 2.6 billion $1 bills were destroyed in what was one of the world's biggest currency destruction at that point.

The Centre had in the Budget this year announced a four month compliance window, allowing domestic black money holders to declare their unaccounted wealth, by paying a tax and penalty of 45 per cent and escape prosecution and harsher punishment. It has also encouraged the use of non-cash and digital payments, amended the Benami Transactions Act and implemented the Income Declaration Scheme 2016. However, skeptics point out several flaws in the move, saying that it is bound to prove bad news for those who do not have a bank account in the country. About 49 percent adults in the country have no bank account while only 22 percent accounts are with debit cards, according to several research estimates.

In addition to this, the government move will also turn Indian rupee less credible for commoner for the sometime and drive them towards gold, raising the demand for the yellow metal.

The Indian rupee may go down beginning Wednesday against major currencies. Already there is an apparent shortage of low denominations currency which have made presses have worked over time to enhance the supply.

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