India’s “mini-demonetisation” through the withdrawal of Rs 2,000 notes has no monetary policy implications but may be politically motivated, said Jefferies Chris Wood.
Wood said in his weekly “GREED & Fear” that the note withdrawal is “officially rationalized from an anti-corruption point of view”.
“But there is also a political motivation on the part of the ruling Bharatiya Janata Party to fund the opposition parties. Elections in India are financed by money stuffed with cash,” he wrote.
India will experience a series of state polls this year and general elections in 2024. The withdrawal of 2,000 rupee notes is unlikely to be disruptive to the economy, analysts said. Unlike demonetisation in 2016, local banks have not seen a rush to deposit notes, but consumers have opted to spend them on mangoes or luxury watches. Wood remains “constructive” in India.
“The most obvious upside from an equity market perspective is that the monetary policy tightening cycle is almost over and inflation has been falling in recent months,” he wrote.
Headline inflation in India eased to 4.7% in April and further eases to nearly 4% in May. Wood expects inflation to average 5% this financial year and expects a cut in key interest rates either later this year or next year.
With the monetary tightening cycle over, “there is no obvious near-term trigger for further valuation cuts, other than a bout of external risk-reducing market measures,” he wrote.
Indian equity markets at an annualized forward price-to-earnings ratio are 18x, according to the note, which is slightly above the ten-year average of 17.4x.
“Foreigners have also recently returned as net buyers of Indian stocks as they have pulled back from China,” Wood said. After foreigners sold a net worth of $4.5 billion in Indian stocks in the three months to February, they bought a net worth of $7 billion since March.
