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Quick profit in coins or not?
By Richard Giedroyc
September 15, 2017

If you are looking for a good place to speculate in coins, India might be where you want to be – maybe.

According to the Aug. 4 issue of the Indian newspaper The Hindu, the unofficial exchange rate in Kolkata (formerly known as Calcutta) is currently 500 rupees in bank notes for 575 rupees in 1- or 2-rupee coins.

When a deal sounds too good to be true it usually is, and that appears to be the case in India. The 1- or 2-rupee coins are legal tender, but banks are no longer accepting them for deposits. For this reason, merchants are becoming increasingly hesitant to accept the coins as well.

Only a few months earlier the conversion had been going in the other direction, with illegal money-changers or battawala converting 100-rupee bank notes into coins worth 90 rupees on the black market. The moneychangers were making their money selling much needed small change coins to merchants for a profit.

The problem began when on Nov. 8, 2016, the government of Prime Minister Narendra Modi demonetized India’s 500-rupee (about $7.80 US) and 1,000-rupee bank notes (about $16 US) on short notice. The move was meant to flush out vast amounts of undeclared and untaxed cash. Corruption, financial scandals, and a thriving black market have plagued India for years.

The public had until Dec. 30 to deposit the notes into bank accounts. Over-the-counter exchanges were limited to between 2,000 and 4,500 rupees per day. All exchanges ceased on Nov. 25. Foreign tourists and out-bound passengers at airports were limited to exchanging 5,000 rupees in the withdrawn bank notes.

The problem is that India is about 86 percent “cash-centric.” The RBI issued large numbers of 10-rupee coins to compensate for the recalled larger denomination bank notes. The bank did not expand the number of 1- or 2-rupee coins being released.

Regardless of the facts, perception can be everything. Rumors quickly began that the 1- or 2-rupee coins were no longer legal tender.

The central bank issued guidelines that banks must accept all legal tender currency; however, several sources indicate that banks are either refusing to accept or are making it inconvenient to deposit coins.

The Hindu sent a reporter to the United Bank of India with 500 rupees in current coins. The cashier told the reporter, “Bring 25 packets of 100 coins of the same size, design, and denomination,” adding, “We don’t count coins manually to avoid wastage of time and the machines cannot take any denomination or size either.”

According to the Aug. 6 issue of India West, “[Prime Minister] Modi and company considered change of currency to be the most effective way to root-out corruption from Indian society.”

The India West article continues, “The demonetization project is intended to cleanse the Indian economy of underground stream and modernize it, and integrate it into the world economies … Socially and culturally it is a sensitive issue but at the individual level bribes are the prime source of black (unaccounted) money, which then finds its way into real estate transactions, weddings, jewelry, etc. The tax-evaded monies, on the other hand, generally fund political activity in India.”

Officially, India uses coins in denominations of 50 paisa, 1 rupee, 2 rupees, 5 rupees and 10 rupees struck at mints in Hyderabad (split diamond, dot in diamond, or five-pointed star under the date mintmark), Kolkata (no mint mark), Mumbai (diamond mintmark under the date) and Noida (small or thick dot under the date mintmark).

Bank notes are issued in denominations of 20 rupees, 50 rupees, 100 rupees and 2,000 rupees. The most recent issue of MRI Bankers’ Guide to Foreign Currency cautions: “Do not buy! The recent 500- and 1,000-rupees notes are redeemable only until March 31, 2017, under very complicated rules.” The guide also notes older 1-rupee through 100-rupee notes are redeemable.

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