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Brokerages Predict Short Term Pain, Long Term Gains From Modi’s Cash Purge

Brokerage houses welcome the government’s move on scrapping Rs 500 and Rs 1,000 currency notes.

 A female counts Indian rupee banknotes (Photographer: Dhiraj Singh/Bloomberg)
A female counts Indian rupee banknotes (Photographer: Dhiraj Singh/Bloomberg)

The war on black money will be great in the long term but is bound to lead to some near-term disruption says a Bank of America Merrill Lynch report. Calling it the “mother of policy shocks”, the report says there are far reaching effects of the government’s aggressive action against the cash economy includes formalisation of the shadow economy, increased tax collections, and potential reduction in corruption.

A Citi Research report, on the same issue says the government’s move could lead to some deflation, lower demand and dent economic activity in the short-term. The brokerage says it will be tracking the short-term risk to the economy very closely.

Brokerages Predict Short Term Pain, Long Term Gains From Modi’s Cash Purge

Pressure Points

The Bank of America Merrill Lynch report, does say that this move may lead to some issues for businesses lending to small debtors. The one sector that could also be hit adversely is real estate, with prices expected to moderate and sales volume dropping, says the report.

Equities might have a negative response if the market perceives the deflationary/contractionary impact to be meaningful. 
Citi Research report
The duration of such impact is difficult to anticipate; should worries about near term disruption lead to a correction in Indian equities, we would be buyers for the long term upside this, and other recent policy measures present.
Bank of America Merrill Lynch report

Along with the real estate market, consumption related sectors are likely to witness demand slowdown in the near term.

Near term estimates for consumer stocks can come under pressure. If this leads to any meaningful correction in the principle consumer discretionary names, we would be buyers for longer term upside (greater inclusion now, lower interest rates, pay commission, rural growth)
Bank of America Merrill Lynch report

On the positive side, Bank of America Merrill Lynch expects banks to see stronger growth in deposits as well as transaction fees.

Impact on Bond & Currency Markets

Larger bank deposits, chances of deflationary pressures and better tax collection possibilities are positives for Indian bonds, says Citi.

The impact on USD/INR is theoretically positive, says Citi, as the supply of INR comes down but any large equity outflows in an uncertain environment could curb the rupee movement.