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The markets fell two per cent on Tuesday, with the benchmark Sensex ending at a near-six-month low, on fears that the demonetisation move by the government would severely disrupt the economy, which is largely cash driven. Shares of consumption-led sectors such as automobile, consumer goods, realty and housing finance extended their losses on the back of huge sell-off by investors, worried about their near-term prospects. The S&P BSE Sensex and Nifty 50 closed below their respective 200-day moving averages, a key indicator for markets.
“We regard this (demonetisation) as a positive move for both the economy and long-term growth as the grey economy is close to 75 per cent of GDP (gross domestic product), according to some estimates… However, it will be disruptive in the short term given India is largely a cash driven economy. India had undertaken a similar exercise in 1978. During that time there was a dip in money supply, GDP growth, inflation, and consumer expenditure, but it was a short-term phenomenon,” said Devendra Joshi, strategist-Asia Pacific, HSBC.
In order to clampdown on black money, the Prime Minister on November 8 recalled currency notes of Rs 500 and Rs 1,000 — 86 per cent of the currency in circulation. Analysts said while the move will be positive in the long term, it would create significant short-term shocks and lead to deceleration in consumption demand.
“Demonetisation will have significant short-term shock on most sectors. Demand curve is expected to remain weak in medium term. Private investment would weaken further; a deflationary environment will require more monetary and fiscal intervention. Rate cuts may be on the way, but that can’t help change risk aversion in the short term,” said Govindarajan Chellappa, managing director- head of India research, Jefferies.
Since November 8, the benchmark indices have lost nearly 5 per cent and Indian market has seen an erosion of Rs 6.66 lakh crore of investor wealth. The benchmark Sensex fell 1.92 per cent to end at 26,304.63, lowest close since May 25. The Nifty 50 closed at 8,108.45, down 2.26 per cent, most among global markets on Tuesday. The rupee fell 0.74 per cent to end at a five-month low of 67.74.
The surge in US bond yields, triggered by unexpected victory of Donald Trump in the US presidential elections, has also been weighing on the performance of emerging markets like India. The increase in yields is seen as a precursor to higher interest rates in the US, which will make riskier assets unattractive and led to capital outflows.
On Tuesday, foreign institutional investors (FIIs) pulled out Rs 2,354 crore from Indian markets, taking their four-day selling tally to Rs 6,500 crore. Domestic investors were seen providing some counterbalance to the FII sell-off. However, their buying was also seen flattering as they pulled out Rs 100 crore on Tuesday, provisional data showed. Market players say the demonetisation move could impact premium collections at LIC, which could restrict its market investments.
