Impact of Demonetization on Forex and Commodity Derivatives-An Event Study

Demonetization is the process of withdrawing legal validity of a currency unit. The government of India announced that this demonetization action would cut down the shadow economy and crack down on the use of illegal and dissimulated cash to fund illegal activities and terrorism. Demonetization in India and last presidential election in the US might be affected Indian foreign exchange market and commodity market simultaneously. This study examines the impact of demonetization announcement on gold futures prices and currency exchange rate of Indian rupee with various currencies. The authors employed event study methodology. The objectives of the study were (a) to measure the expected returns of the selected currencies and commodity futures, in pre and post demonetization, (b) to investigate the impact of demonetization on foreign exchange market and commodity market, (c) to propound a brief knowledge about the concept of demonetization and its consequences. This study considered four currencies to study the impact of demonetization, i.e., US Dollar, Euro, Pound, and Yen. Being the most traded commodity future, it is considered gold futures as a proxy for Indian commodity derivatives market. Finally, this paper could identify that there were not many shocks on forex markets as well as commodity derivatives market from the demonetization announcement.