ATM Closed! Relax the Indian Economy Just Got a Booster Shot - The 5 Minute WrapUp by Equitymaster
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ATM Closed! Relax the Indian Economy Just Got a Booster Shot

Nov 9, 2016
In this issue:
» Why Banks will be Awash with Liquidity?
» Going Cashless Too Soon...
» ...and more!
00:00
Madhu Gupta, Research analyst

ATMs have become indispensable.

The freedom of Any Time Money has empowered the average individual more than ever before.

Therefore, the very thought of ATMs closing down can wreak havoc in the lives of people.

The world was witness to one such financial turmoil in Greece last year.

As the nation sunk deep down in debt with creditors wresting control, there was a virtual collapse in the economy.

And to prevent panic, banks were closed for an entire week. ATMs allowed only limited cash withdrawals with a number of them running out of cash. The Greeks simply jostled and struggled to meet their daily ends.

But in a country like India that is presently the fastest growing economy in the world, such a situation is remotely unimaginable.

At least until yesterday when the government, in a surprise and unprecedented move, announced a ban on Rs 500 and Rs 1000 notes. These notes are to be replaced by the refurbished Rs 500 and Rs 2000 notes that would be launched soon. And to facilitate this transition, Banks and ATMs are closed today.

As soon as the announcement was made late in the evening yesterday, it unfolded a mad rush with people queuing outside ATMs to get as much Rs 100 denomination notes as they can.

The economy has moved towards plastic money and online transactions. But in the absence of complete financial inclusion, cash still remains an integral part of our small daily transactions.

We Indians are currently feeling the same pain that the Greeks underwent. But the similarity just ends here.

The average Indian is feeling inconvenienced and helpless at the moment. But unlike the Greeks that are caught in a debt trap, the Indian economy is in fine fettle and the present move is likely to further revitalize it by sapping out the unwanted black money and reducing the wide disparity gap.

People, that had been hoarding loads of unaccounted money in the form of cash, will be hit hard as they are left with only two choices. Either to declare their illegal bounty or just let it turn trash. Either ways, it will help in cleansing the economy of its black money menace. Moreover, it will also crack the whip on counterfeit notes that are being smuggled into the country to fund terror activities.

There is no doubt that the economy will be in much better health after shedding the black money load. And the improving fundamentals are likely to boost the stock markets in the long run. It also means more inflows in equities as other investment avenues for black money dry up. In short equities as an asset class is expected to benefit from this crackdown.

And with the stock markets down, the time is just ripe to go out for bargain shopping. But without losing focus of the principles of stock selection. The rule of the game is investing in fundamentally strong companies with durable moats and strong managements that are available at reasonable valuations.

As they say that no gain without pain. Therefore, the current pain will only set the tone for a fundamentally stronger and balanced economy in the long run.


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03:45 Chart of the Day

Past few years saw the banks struggling to increase their public deposits. The declining trend of aggregate bank deposits over the past few years was seen as a major concern by all the banks.

Higher interest rate provided by small savings schemes were said to be the major contributor for the deposits to decline. Moreover, banks also had to keep its deposit rates high to fend off competition. Thus in-turn the lending rates remained high for the banks.

However, the governments initiative to curb the menace of black money through demonetization of high value currency notes has meant some good news for the banks. Money which was out of the banking system i.e. excess cash will now enter the banking system in the form of deposits. Thus, in the short term, banks will be awash with liquidity. Aggregate bank deposits growth rate will rise.

In addition, current and savings account, a source of lucrative low cost deposits will also help the banks in reducing their cost of borrowing. This could drive the interest rates lower and provide a fillip to bank credit growth as well.

Bank Deposits to Swell in the Short Term


However, not all will be a positive for the banks. Those banks having a large exposure to real estate developers might see their loan book quality deteriorate. Thus rise in provisioning and loss in interest income due to a spike in bad loans can also result in banks being unable to pass the benefits of cheap deposits to its customers.

04:20

The government made a bold move last night with its plan to demonetize its old Rs 500 and Rs 1,000 currency notes in order to help fight black money (money on which taxes haven't been paid) stashed in the country.

This step is also seen as a step towards driving the economy to go cashless. In the long run, this is good news for the country. Going cashless will mean more accountability of the supply of money in the country. This will also drive more people under the tax net. This will impact the small businesses and poor too. India is still underpenetrated when it comes to ATM cards or mobile payments. It still is not financially inclusive.

A recent study conducted on the usage pattern of debit cards by the general public revealed that most of the people used their debit cards for withdrawing cash, thus effectively diluting the motto of going cashless. Going cashless also will not be beneficial for everyone at one go, the poor and unbanked will have bear a large burden for this implementation. We think the government has just jumped the gun here on its efforts to bring in more transparency and on promoting digital transactions. The intent is good but timing might just be too early.

04:45

After opening the day in the red, the Indian stock markets continued to trade well below the dotted line. At the time of writing the BSE-Sensex was trading lower by about 339 points (down 1.2%), while the NSE Nifty was trading lower by 112 points (down 1.3%). All the sectoral indices were in the red and trading under pressure.

04:55 Today's Investing Mantra

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Rohan Pinto (Research Analyst).

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1 Responses to "ATM Closed! Relax the Indian Economy Just Got a Booster Shot"

KD

Nov 9, 2016

In 1978 Morarji Desai also did this. Did it stopped black money? This is nothing but political gimmick to divert attention. IT HAS NO ECONOMIC MERITS.

Like (1)
  
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