Scrapping notes to hurt economy in near run, say global brokers

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Government’s step to scrap Rs 500 and Rs 1,000 currency notes will hurt economy in the short run specifically discretionary consumption, gold and property demand, but the measure in the long term will help formalise the economy, according to global financial services majors.

“In the near-term, this move may hurt economic activity, specifically discretionary consumption, gold and property demand,” UBS said in a note adding in the long term it would result in efficiency and access to lower cost of capital.

 hurt economy

“We view it as a positive for financials potentially but over the longer term. Combined with GST and Aadhaar driven financial inclusion,” it said.

UBS also noted that the measure would not have “material impact” on Indian capital markets and the stock trading would be driven more by global factors and earnings.

Similarly Japanese brokerage Nomura said while citizens will be inconvenienced in the short term and the move could hurt consumption demand, this is a big medium-term positive in the government’s effort to crack down on black money and corruption.

It also noted that as the old currency notes are deposited with banks, the deposit growth will witness a pickup and currency in circulation will moderate – a positive for banking sector liquidity.

Moreover, it said as rural households open new bank accounts to deposit old notes, this may also end up giving a boost to the government’s financial inclusion thrust.

It also noted that since black money played a role in real estate transactions, this crackdown is very likely to hurt the real estate market, which is already reeling under high inventory in top tier cities such as Mumbai and Delhi.

Besides, the move will help boost the government’s tax revenue collections as some of the black money is brought under legitimate channels, Nomura said.

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