De-monetization: Impact and opportunity

Rs.500 and Rs.1000 notes banned!


I am sure all of us would have debated demonetization and the government’s decision to ban Rs. 500, and Rs. 1000 notes enough by now.

While the whole economy gets impacted in several ways because of this action, let’s examine the main expected events and what can be done by us to derive maximum advantage from these developments.

Expected events

  1. Banks would be flush with deposits as all are required to deposit Rs 500/1000 notes being held by them.
  2. Since the amount of cash is bound to go down in our economy, Inflation is also expected to go down. RBI will get headroom to further cut policy interest rates. RBI rate cuts could come in as early as December if not February.
  3. The real estate prices will correct especially in areas where there was a substantial black money involvement in deals.
  4. As demand and spending go down in the short term (3–6 months), sectors like real estate, cement, jewellery, travel, consumer electronics and white goods would be adversely impacted.
  5. The demand for gold would be subdued in India for the short term as a significant portion of this market was in cash. Gold Prices would, however, be more dependent on the global factors

There is an estimated correction of around 20–40%% in real estate prices in most regions.

Impact on us

  1. Bond prices are expected to go up on account of two major reasons.Banks would have to bring the fixed deposit rates down to maintain their profitability. The interest rates could indeed go down by 0.75%-1.5% in the next 6–12 months. Further rate cuts by RBI can be expected.

    Banks would be required to park the surplus deposits received by them in Government bonds to generate returns from these deposits
  2. Real Estate as an investment option looks very bleak in short to medium term.The property prices could linger on at the current levels or further correct in the medium term. Also, the existing unsold inventory would take a lot of time to get liquidated.
    It might mean that real estate would not even give inflation beating returns over the next 2–5 years.
  3. Equity investments might see a correction, in the short term, on account of the blip in spending and already high valuations. However, in the long term Equity would be the most benefited asset class from this move.

What we must do

  1. Invest in Debt Mutual funds to take advantage of the falling interest rates and increasing bond prices.
    Interest rates and Bond prices have an inverse relationship. Whenever interest rates go down the bond prices, go up and vice versa. These funds seem best poised to generate the best returns in the near term.
    You can visit our Better than Fixed Deposit funds to invest.
  2. Do not invest in real estate from an investment point of view.In fact, it would be a good time for people to sell their existing properties (if you can find a buyer who is ready to pay the entire transaction amount legitimately) and invest the money in debt funds. Once the equity prices have corrected from their current levels and the view on equity turns positive, the aggressive clients can move their investments into equity for better returns.
  3. Gold prices would be driven more by international events. We would advise our clients to avoid Gold as an investment option for the time being.

*All returns are indicative basis past performance. Actual performance can vary.*

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