My Newsfeed

The Indian government's aggressive push against black money has turned the country's bond markets around: a sign that many expect that the reform will pay off for the country.

The withdrawal of 86% of India's cash has been a shock to the system - the cash according to analysts accounts for 12% of the country's GDP. The government has been trying to address the cash shortages with defense jets carrying new notes to various parts of the country, and by making withdrawal exemptions for farmers and parents arranging marriages. 

Banks across the country have received over Rs. 4 lakh crores in deposits since November 9. Deposits are expected to touch at least Rs. 10 lakh crore in the coming weeks. Will Modi's plan work?

One sign that most analysts and investors think that it will pay off is the bond market: Bloomberg points out that India is the only country out of the 53 tracked whose bonds have rallied since Donald Trump's election, with bond yields falling (Chart 1). This means that investors are expecting the Indian economy to see lower inflation, and more reliable cash flow in the coming months - the Indian economy might represent a safe harbor, as other markets turn turbulent with Donald Trump taking office in January - a US President who is likely to push high spending by relying on public borrowing and potentially high-deficits. 

Chart 1: India's bond market rally, while other countries saw uptick in yields since the US election. Mexico has been hit hardest. Source: Bloomberg charts

Of course, there are speed-bumps on the way: the Modi government has been slow in replacing old bank notes, and the move to withdraw the old money took place at the height of sowing season for farmers, potentially hobbling them in purchasing seed and fertiliser. Bank access in areas where farming is dominant is sparse, and usually requires half a day's travel to even reach a bank branch. The problems that these areas face are compounded by the short supply of new notes. This may impact farm and agri output, as well as farmer incomes months down the line.

Additionally, the overall bid by the government to push and nudge and coax people towards less cash and more digital, cashless transactions is a tough shift in an economy where cash habits are long ingrained, and there is not yet a fully digital approach that is universally accessible, costless and does not require at least some literacy with numbers and text. Despite all these ifs and buts however, the markets believe that the light at the end of the tunnel is a bright one. 

• The government has announced steps to ease the cash crunch for farmers set to sow their crops, but caught off-guard by demonetization. The government announced that farmers can now withdraw up to Rs. 25K a week against crop loans to ensure the sowing of winter crops. The time limit to pay crop insurance premiums have also been extended by two weeks, and people can withdraw upto Rs. 2.5 lakh for wedding expenses. At the same time, the exchange limit in general for old notes has been cut to Rs. 2000. While people interviewed across the country have expressed support for the move, saying that it'll reduce black money and corruption, the Opposition has attacked the government, calling the effort ill-thought out and badly executed, resulting in "economic anarchy". The government has defended the move, saying that no honest taxpayer will "lose a single rupee". The RBI noted that Indian defense jets are on standby to airlift cash to remote parts of the country. 

• SBI has written off Rs. 7,016 crore worth of bad loans owed by 63 'wilful defaulters' from its books including the Rs. 1200 crore owed by Vijay Mallya, and after an outcry from opposition parties in Parliament FM Arun Jaitley clarified that this was a write-off from the bank books and not a waiver. The SBI has now labelled these loans Non Performing Assets, in a section called AUCA or "Advance Under Collection Accounts", which allows the bank to take the bad debt off its books while still trying to recover the amount. 

• Nasscom has revised India's IT services growth rate for 2016-17 downwards from 10-12% to 8-10%. Nasscom last predicted a growth rate below 10% during the 2008 global financial crisis when many companies had significantly cut spending. This year IT companies have been hit by lower spends post Brexit, and worries about growing protectionism in the UK, post-Trump US and EU. 

• Stock in spotlight: Coal India Limited continues its market fall and is among the top losers in today's trading. The company has been hit by falling demand for coal and has missed its recent targets. While imports are falling, pickup in demand remains uncertain through the next year. 

• Photo of the day: A billboard in Montenegro with Putin and Trump featured together. Putin had faced allegations of interfering with US elections to help Trump win. REUTERS/Stevo Vasiljevic

Across the country, the queues are long and tempers are short. The overall consensus emerging among analysts is that the economy will be boosted overall, but some sectors will see blips downward due to the impact on grey markets and black money transactions.

Some stocks are emerging as clear winners this week, as analysts begin to see trends in specific sectors especially after demonetization. Recent remarks by SBI Chief Arundhati Roy and former RBI Governor D Subbarao have also helped clarify the longer-term trends.

Demonetization Winners: The Banks

A lot of money that so far had stayed under mattresses and in cupboards has entered the banking system. The result is that banks have been big gainers here. The banking sector had been reeling under rising NPAs, missing their quarterly estimates. Yet, SBI - flush with Rs. 40,000 crore+ of funds from new deposits - is now trading over its 200 day SMA. The banks that benefit the most are the ones with strong retail and chain presence that people can easily access to deposit money and open accounts - ICICI Bank and HDFC Bank.

Other beneficiaries are likely to be Housing Finance Companies that will gain from the lowering of interest rates in the coming months, encouraging borrowers; this would especially hold for firms like PNB's Housing Finance Corporation, which have a lower proportion of loans taken against existing property on their books. Such property-linked loans may become a risk for HFCs as the value of this mortgaged real estate falls and as the government continues its crackdown on assets purchased with black money. Loan providers who deal primarily with cash like Muthoot,Manappuram Finance and Ujjivan, will struggle in the short-term - and investors agree, with many stocks in this space seeing high volume movement downwards. Ujjivan has lost over 20% of its market value in the last week. 

Demonetization Losers: Real Estate, Construction, Consumer goods and services, E-commerce, Auto

Real-estate was one of the first sectors to take a hit post the demonetization announcement, with major real-estate companies losing substantial market value post announcement - as much as 15%. Property deals under discussion across the country have come to a pause or have fallen through. Related industries like construction, cements (housing consumes 70% of cement produced) and paints will also be affected - the impact will include bigwigs like Ambuja Cements and Asian Paints. 

However, its also becoming clear for other sectors that customers are at least temporarily tightening their purses overall. Customers postponing spending will impact stocks like V-Guard (which recently gained 128% over its 52 week low), auto purchases and food and beverage industry stocks like Coffee Day, which are being impacted short-term during a quarter which usually accounts for high sales numbers. FMCG companies like HUL and Dabur are likely to recover quickly however due to customer loyalty and strong product preferences, while ITC is likely to be affected with the impact on cigarette sales.

Why is the demonetization impact expected on consumer spending mainly in the short-term? Because the longer term effect on bringing down the inflation rate, as well as the interest rate, will be an overall boost to customers once money supply is sorted out. However it also remains to be seen how quickly money flows will be restored in rural areas and villages, since the ability of farmers to take loans for seeds and fertiliser will determine harvest and agri growth impact months down the line. 

• Demonetisation has hit grey markets hard, with interest rates for grey market loans having fallen to historic lows from 30% to below 5%, since most money lent was black in 500 and 1000 notes. In addition, investors of real-estate, who have been buying land with black money, are especially struggling to sell land in light of the government promise to crack down on 'benami' properties. 

• Tata Global Beverages - which owns Tetley teas and has a joint venture with Starbucks in India - released results showing a 48% increase in Q2 profits. The stock is up 5% on the heels of the announcement. However, that news was overshadowed with the announcement that TGBL has ousted Cyrus Mistry as its Chairman - the first Tata group company to fire him since Tata Sons removed him from the board. Mistry is currently still Chairman at Tata Steel, Tata Motors and India Hotels. 

• Interest rates in India are set to go down, SBI Chief Arundhati Roy has said, now that bank accounts are full of funds post-demonetization. Banks have parked more than Rs 80,000 crore with the RBI in the past few days through various liquidity operations windows. Home loans are likely to become a lot cheaper over the next six months with interest rate cuts, likely dropping to 7-7.5%. 

• Stock in spotlight: Investors have turned bullish on housing loan companies like CanFin Homes, which tops the gainers screener today. These stocks are rising on the heels of the SBI Chief's statement that interest rates are set to drop, which will make home loans more affordable and boost housing loan firms.  

• Photo of the day: A cricket game in progress in Srinagar, Kashmir Guardian/Saqib Majeed