Mumbai: Chris Wood of Jefferies said that India’s “mini-demonetisation” through the withdrawal of Rs 2000 currency notes has no monetary policy implications, but may have political motivation.
In his weekly ‘Greed and Fear’, Wood said that demonetisation was being “officially rationalized on an anti-corruption angle”.
“But there is also a political motivation on the part of the present Bharatiya Janata Party government in terms of funding activities of opposition parties. Elections in India are funded from warehouses full of money,” he wrote.
Elections will be held in many states in India this year and general elections will be held in 2024.
Analysts say that the withdrawal of Rs 2000 notes is unlikely to be disruptive to the economy. Unlike the 2016 demonetisation, local banks haven’t seen a rush to deposit notes, but consumers have chosen to spend them on everything from mangoes to luxury watches.
Wood remains “creative” on India.
“The most clearly positive point from a stock market perspective is that the cycle of monetary tightening has come to an end, with inflation declining in recent months,” he wrote.
Headline inflation in India fell to 4.7% in April and fell further to near 4% in May.
Wood sees inflation averaging 5% this fiscal year and expects a policy rate cut either this year or next.
They wrote, once the monetary policy tightening cycle is over, “there is no clear near-term trigger save another rating de-rating for external risk-off market action”.
The Indian stock market, according to the note, stands at a one-year forward price-to-earnings ratio of 18x, which is slightly above the 10-year average of 17.4x.
“Foreigners have also returned of late as net buyers of Indian equities as they pulled back again from China,” Wood said.
After selling Indian equities worth $4.5 billion on a net basis in the three months to February, foreigners have bought shares worth $7 billion on a net basis since March.
(Reporting by Ira Dugal; Editing by Sohini Goswami)