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I think the Indian government might be overestimating its ability to determine what "money" is. The Iraqi Swiss dinar is a great example of how a currency in circulation can maintain (even increase) its value despite being no longer officially endorsed.

[1] https://en.wikipedia.org/wiki/Iraqi_Swiss_dinar

There will be an exchange rate. People who can safely deposit old money into their bank account have a new way to make a profit.

So the question is, what will the exchange rate be?

depends how close you get to the cut off, I imagine it would be something like bitcoinbuilder where people traded their mtgoxBTC for real BTC at an ever reducing rate until it was obvious that there was no BTC left in MtGox.

The scary but the best thing is that the two denominations make up around 80% of the cash in flow.