In a surprise move, Hr. Prime Minister Shri Narendra Modi on Tuesday announced scrapping of Rs.500 and Rs. 1,000 notes by midnight, triggering a panic situation. These currencies are no longer a legal tender. This is a bold move which is widely considered as an efficient way to curb black money and also that will eventually help towards creating a more cashless economy.
Banks are closed for a day to replenish with new currencies. Although it has created confusion in the minds of people, things are going to be better for the organised sector, in the days to come.
The government had earlier come out with an asset declaration scheme by giving a window to self-declare unaccounted money and undeclared assets for which the date ended on September 30, 2016. The response this scheme was neutral, leading to declaration of about Rs 65,000 crores.
The government was planning the demonetisation of old currency notes in secret for the last 6months. By removing these high value currencies, the government also expects to control counterfeit currencies which are considered the main feeder for terrorist activities in the country.
How is it going to affect you?
No need to worry if you are holding legitimate currency: You can go to your bank and deposit the money or get it exchanged with lower denomination currencies, at your convenience. Even though there are temporary limits set for such transactions, the process will get simpler in the days to come.
If you are an NRI holding these high value Indian currencies, you can deposit it in your NRO (Non-Resident Ordinary) account if you are in India. If you are currently staying abroad then you can send it through your kin who is travelling home and get it deposited in your NRO account back home.
In our view, this exercise will strengthen the economy and stock markets as money is expected to flow back to the stock market.
Let’s look at the impact it can create in certain sectors;
• Real Estate: Prices can go down further as demand goes down. It is suspected that a large number of currency transactions are happening in this sector. Demonetisation is negative to the sector and stock prices of all realty companies are expected to get hampered.
• Auxiliary businesses like cement, steel manufacturing companies etc. are also going to be stressed in the short term.
• Gold and Luxury items may see less interests as people with large amount of unaccounted money cannot just buy gold or any luxury items, as they are mandated to disclose their PAN and identity details at the time of purchase. Gold prices may go up for a very short period but will come down quickly as demand fades out.
• Fast Moving Consumer Goods will also get affected to an extent as common people who prefer to buy small quantities, say, from a nearby kirana store will shy as shortage of smaller denomination (which has largely drained out from the economy) will deter them. FMCG stock prices will go down and will be volatile in the short term.
• Apart from this, till the new currencies are widely available, certain sections of the society will also face short term disruptions in providing their services viz., Farmers and agriculture related sectors, small traders, Professionals like Doctors, SMEs, Service sector in general, political parties who are raising funds from general public, etc..
Overall, this decision will do well for the organised sector and people who are holding black money are the one who are going to pay the price. For the Indian stock market, it is euphoria moment as it will create opportunities for both traders and long term value investors.
A novice investor can take the mutual fund route and invest in well diversified funds which are dynamically managed. Certainly, it’s good times ahead for all us. Happy Investing!
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Video courtesy: Times Now