The country’s central bank said 405,000 counterfeit 500- and 1,000-rupee notes were found in the banking system in the year that ended in March, representing around $4 million. But researchers at the Indian Statistical Institute estimated this year that the total value of fake bills in circulation, including those that go undetected by banks, may be as high as $60 million. Now, this is a major discrepancy considering the fact that ISI is invested with data collection, and if one were to go extrapolating this discrepancy, the breach is already broken even without the government stepping in to play its complicit part.
India is a cash-rich economy, in that most of the transactions are effected in hard cash. This predominance leads to huge stacks in store leading to culmination of corrupt-practices that multiply. One way to emaciate the flow is through narrowing the spigot, which is precisely what is expected out of this exercise, though a caveat of it leading a full circle to corruption cannot be belittled as you have wonderfully explained. But, this spigot narrowing could at least streamline the cash flows of abundance in terms of higher-denomination for the time being. But, how would this cause any lowering in corrupt practices? Probably, it might only for the time being with increased liquidity in banks seize up economy by making it difficult for large volumes of transactions, especially in sectors allied with infrastructure.
How is the gold sector impacted? Negatively to begin with as no one is investing in gold bullion but rather placing orders to capitalise once the system smoothens. The RBI might go slow on open market operations (OMOs) till there is clarity on how much money will flow into bank deposits by December 30. Moreover, this adverse wealth impact will likely hurt higher-end discretionary demand temporarily. At the same time, lower rates should provide a buffer. A combination of two would result in RBI recouping forex reserves if the adverse wealth effect cuts down gold import demand, a teleological consequence.