Note ban likely to fuel volatility in  markets, say banks, brokerages

“The flash decision to demonetize Rs 500 and Rs 1000 notes announced on Wednesday reflects the government’s strong intent to improve India’s global image by curbing the menace of black money and counterfeit currency. This is one of the best measures taken by the government and will bode well not only for the indigenous industry but also foreign investors. This is a significant step for creating a “Swacch Bharat” free from corruption”. – Sudhir Mehta, Chairman CII Western Region and Chairman & Managing Director, Pinnacle Industries

New Delhi : Government’s move to ban Rs 500 and Rs 1,000 notes is expected to have a positive impact on the economy in medium to longer term, however, there could be some short-term volatility in stock markets, Citigroup said in a report. According to the global financial services major, the potential impact of the government’s move on certain sectors like real estate, housing finance, banks, fintech/payment space and consumer discretionary space is expected to fuel volatility in the markets, reports PTI. “This event, along with US election results coming out now could result in short term volatility in the markets,” Citigroup said in the research note adding “however, we do expect longer-term positives for equities”. The Sensex opened sharply lower at 26251.38 points this morning and moved further down within seconds to touch a low of 25902.45 points — down 1,689 points from its previous close — with all 30 stocks from the benchmark index trading deep in the red.

The government’s ban on high-value notes is expected to come as a shot in the arm for financial savings in the long term as households may cut down allocation for physical assets such as gold and property, says a Morgan Stanley report. According to the global financial services major, this could affect economic activity in the near term, but will be more than offset by the positive impact resulting from improved transparency and tax compliance in the medium term.  “… households have traditionally parked their savings in physical assets such as gold and property. This move would also have an impact on their allocation decisions and have the impact on improving financial savings within the economy,” Morgan Stanley said in a research note. From a funds flow perspective, household physical savings stand at around USD 270 billion (13 per cent of GDP).

[alert type=”e.g. warning, danger, success, info” title=””]“The decision to scrap `500 and `1000 currency note by the Modi Government is a positive step towards fight against black money. It will cause some temporary inconvenience to the common man in terms of converting from the old series of notes to new `500 notes and later the new `2000 notes. But that inconvenience is a price that is worth paying for the long term benefit of addressing this issue once and for all. This move should improve India’s position on transparency and corruption in the global league table enabling higher capital flow into India”. – CS Mamta Binani, President, Institute of Company Secretaries of India[/alert]

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