Jefferies’ Chris Wood believes that India’s recent withdrawal of 2000-rupee currency notes has no monetary policy implications, but may have political motivations. The withdrawal is officially being rationalised on the anti-corruption angle, but there is also a political motivation in terms of opposition parties’ funding activities. Elections are financed in India by godowns stuffed with cash. The withdrawal of 2000-rupee notes is unlikely to be disruptive for the economy, analysts have said. Unlike the 2016 demonetisation, local banks have not seen a rush to deposit notes, but consumers have chosen to spend them on mangoes to luxury watches.
As mentioned in a news article on a report by Reuters, India’s recent withdrawal of 2000-rupee currency notes, also known as the “mini-demonetisation,” may have political motivations, As mentioned in a news article on Jefferies’ Chris Wood. In his weekly ‘GREED & FEAR’ report, Wood said that while the note withdrawal is “officially being rationalised on the anti-corruption angle,” there is also a political motivation on the part of the incumbent Bharatiya Janata Party government in terms of opposition parties’ funding activities. Elections are financed in India by godowns stuffed with cash.
India will see a series of state polls this year and a general election in 2024. The withdrawal of 2000-rupee notes is unlikely to be disruptive for the economy, analysts have said. Unlike the 2016 demonetisation, local banks have not seen a rush to deposit notes, but consumers have chosen to spend them on mangoes to luxury watches.
Despite the potential political motivations behind the note withdrawal, Wood remains “constructive” on India. “The most obviously positive point, from a stock market standpoint, is that the monetary tightening cycle is all but over with inflation falling in recent months,” he wrote. Headline inflation in India has fallen to 4.7% in April and is seen dropping further to near 4% in May. Wood sees average inflation of 5% this financial year and expects a cut in policy rates either later this year or next year.
With the monetary policy tightening cycle over, there is “no obvious near-term trigger for a further valuation de-rating save for a bout of external risk-off market action,” he wrote. Indian stock markets, on a one-year forward price-to-earnings ratio, is at 18x, slightly above the 10-year average of 17.4x, As mentioned in a news article on the note.
“Foreigners have also returned of late as net buyers of Indian equities as they have retreated again from China,” said Wood. After selling $4.5 billion worth of Indian equities on a net basis in the three months to February, foreigners have bought shares worth $7 billion on a net basis since March.
Ultimately, while India’s “mini-demonetisation” may have political motivations, it is unlikely to be disruptive for the economy. With the monetary policy tightening cycle over, there is no obvious near-term trigger for a further valuation de-rating, and Indian stock markets remain attractive to foreign investors.
