 "money cash")
In a bid to clampdown on black money, the government withdrew Rs 500 and Rs 1,000 notes from circulation with immediate effect. Reserve Bank of India (RBI) data suggests that the proportion of Rs 500 and Rs 1000 notes were 86.4% of total value of notes in circulation on March 31, 2016, amounting to Rs 14 trillion. The growth rates in these notes were 76% and 109% respectively in the last five years versus overall currency in circulation going up by 40%, points out a Citigroup note.
Here is a quick compilation of how leading brokerages and research houses interpret the development, and its impact on the economy and sectors.
NOMURA
First, while citizens will be inconvenienced in the short term, this is a big medium-term positive in the government's effort to crack down on black money and corruption. Second, as the old currency notes are deposited with banks, bank deposit growth will witness a pickup and currency in circulation will moderate - a positive for banking sector liquidity.
Third, as rural households open new bank accounts to deposit old notes, this may also end up giving a boost to the government's financial inclusion thrust. Fourth, since black money played a role in real estate transactions, this crackdown is very likely to hurt the real estate market, which is already reeling under high inventory in top tier cities such as Mumbai and Delhi. Fifth, as some of the black money is brought under legitimate channels, the government's tax revenue collections will get a boost.
Finally, we believe the move generally bodes well for the inflation outlook since black money was associated with higher inflation. However, it is likely to hurt near-term consumption demand.
CITIGROUP
There could be an immediate increase in bank deposits if some of the holders of these old notes decide to deposit them rather than exchanging them for new notes. Currency in circulation might decline substantially if heightened scrutiny forces people with unaccounted for cash to not exchange/deposit. The base money goes down in that case but the increase in money multiplier (because of a higher deposit to currency ratio) might mitigate the impact on overall money supply.
If money supply declines temporarily because of these measures, then assuming no immediate change in velocity of circulation, we could either see some deflationary tendencies or lowering of real demand (economic activity). The impacts could be different depending upon sectors – deflationary in some while contractionary in others. This is a short-term risk for the economy.
BofA MERRILL LYNCH GLOBAL RESEARCH
We estimate that this could see disclosure of 1-2% of GDP. We see a three-pronged impact. First, this should lead to lower yields as well as lower rates. After all, Rs 100 of cash that will be disclosed will result, in the first instance, of Rs 55 of bank deposit mobilisation and Rs 45 of taxation (assuming IDS 2016 tax rates) and by extension, lower fiscal deficit. As a result, we grow more confident of our call of a 75 basis point (bps) cut in bank lending rates by September 2017.
Meanwhile, we expect the RBI to go slow on open market operations (OMOs) till there is clarity on how much money will flow into bank deposits by December 30. Second, the adverse wealth impact will likely hurt higher-end discretionary demand temporarily. At the same time, lower rates should provide a buffer. Finally, we expect the RBI to recoup forex reserves if adverse wealth effect cuts down gold import demand.
KOTAK INSTITUTIONAL EQUITIES
We see the government’s decision to remove extant high-denomination notes from circulation and replace them with new ones as a positive for the economy in the medium term. The latest step appears to be the final one in the government’s systematic approach to remove black money from the economy. We expect the economy and the banking system to benefit as a large part of the black economy eventually becomes part of the formal economy.
We do not see any major impact on general consumption as most consumers in India use small-denomination notes for small-value items and transactions and they can anyway exchange their current high-denomination notes with new ones at their banks.
Residential real estate demand has been anyway subdued for some time. We note that it had already become quite difficult to use cash for high-value transactions in India with the requirement of disclosure of PAN (tax number) for high-value transactions.
