India’s withdrawal of 2000-rupee currency notes, dubbed a “mini-demonetisation”, is unlikely to have monetary policy implications but may be politically motivated, In line with Jefferies’ Chris Wood. The move is being officially rationalised on the anti-corruption angle, but there is also a political motivation on the part of the Bharatiya Janata Party government in terms of opposition parties’ funding activities, he said. Elections are financed in India by godowns stuffed with cash. Wood sees average inflation of 5% this financial year and expects a cut in policy rates either later this year or next year.
In line with a report by Reuters, India’s recent withdrawal of 2000-rupee currency notes, also known as “mini-demonetisation”, has no monetary policy implications but may have political motivations. Chris Wood, global head of equity strategy at Jefferies, believes 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. With a series of state polls this year and a general election in 2024, the government may be trying to curb the flow of cash used to finance elections in India.
Despite this move, analysts have said that the withdrawal of 2000-rupee notes is unlikely to be disruptive for the economy. Unlike the 2016 demonetisation, local banks have not seen a rush to deposit notes, but consumers have chosen to spend them on items ranging from mangoes to luxury watches.
Jefferies’ Chris Wood remains “constructive” on India, citing the fact that the monetary tightening cycle is all but over with inflation falling in recent months. 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”, In line with Wood. Indian stock markets, on a one-year forward price-to-earnings ratio, is at 18x, slightly above the 10-year average of 17.4x. Foreign investors have also returned of late as net buyers of Indian equities as they have retreated again from China. 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.
After taking everything into account, while India’s mini-demonetisation may have political motivations, it is unlikely to have a significant impact on the economy. Jefferies’ Chris Wood remains optimistic about India’s prospects, citing the end of the monetary tightening cycle and the return of foreign investors as positive factors.