Demonetisation (alternate spelling: demonetization) means withdrawing or stopping a currency denomination of its status as a legal tender.
Demonetisation refers, therefore, to the process of deciding that certain coins and banknotes can no longer be exchanged for goods and services.
The process of demonetisation takes the symbolic meaning and power away from a given type of currency.
In India, it was announced on 8th November, 2016 that the Rs. 500 and Rs. 1000 banknotes would cease to qualify as valid tender from 9th November, 2016 onward. (Source: wikipedia)
Why is demonetisation used? Demonetisation is used in several situations, whenever a certain type of currency is deemed no longer desirable to use.
Old coins and notes being replaced with new designs: Sometimes, certain denominations of old notes and coins are replaced with newer models. In this situation, the older coins can be officially demonetized. The reasons for such move includes:
elimination of fake notes,
stop terror funding, and
bring unused idle cash into the banking channel, etc.
A move to digital currency: Demonetisation has also moved the economy of India towards a cashless system. Some people predict that in the future we will use digital currency to pay for things and physical cash will be totally demonetized.
Demonetisation in India has worked in the many ways in India. India’s demonetisation process has tackled the country’s problem of counterfeit notes.
The process of demonetisation in India has not been without its challenges. It has, however, had both positive and negative impacts in the short-term. It remains to be seen if the positive impacts will be long-lasting.