India currency demonetisation
Indian banks and cash machines have been witnessing crowds following the government's demonetisation move Amit Dave/Reuters

The US has said it supports Indian Prime Minister Narendra Modi's decision to demonetise Rs 500 (£6) and Rs 1000 (£12) banknotes saying it is an essential step to tackle corruption in the country.

"We believe [this was] an important and necessary step to crack down on this – illegal actions or illicit actions," State Department deputy spokesman Mark Toner told reporters during his daily press briefing.

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According to Modi, scrapping the currencies was aimed at tackling corruption and tax evasion. Modi introduced new Rs 2,000 and Rs 500 currency notes to replace the withdrawn ones.

When asked about the impact of demonetisation on Americans living in India, Toner said: "It was an inconvenience for many Indians, it was an inconvenience for Americans who were also there, and we actually put out a statement through our US embassy to American citizens in India about the changes."

Toner said Washington has explained to Americans living in India on how to go about exchanging their currencies.

"American citizens who are working and living in India I think have the proper information now to exchange those notes or to get new notes, and it's a little bit of an adjustment, just as it was an inconvenience, I'm sure, for many Indians, but I think a necessary one to address the corruption."

Although Modi's decision was hailed by many, it came as a shock to millions of people, especially farmers, small traders, labourers and vendors as they rely more heavily on hard cash than others.

The cash crunch is expected to persist this week as it is pay day on Thursday (1 December) and several Indians were seen queuing up outside ATMs to withdraw their first salary post the demonetisation drive. The withdrawal limit from cash machines continues to remain at Rs 2,500 per day. But the limit is said to hit hard millions of Indians given that the first week of a month is when most payments are made in the country.