MUMBAI, May 26 (Reuters) – India’s “mini-demonetisation” by withdrawing Rs 2,000 notes has no monetary policy implications but may be politically motivated, Jefferies’ Chris Wood said.
In his weekly ‘GREED & Fear’, Wood said the withdrawal of notes is being “officially rationalized from the anti-corruption angle”.
“But there is also a political motivation on the part of the current Bharatiya Janata Party government regarding the financing activities of opposition parties. Elections are financed in India with godowns full of cash,” he wrote .
India will see a series of state polls this year and a general election in 2024.
According to analysts, the withdrawal of Rs 2000 notes is unlikely to be disruptive to the economy. Unlike the 2016 demonetisation, local banks have not been in a rush to deposit notes, but consumers have opted to spend them on mangoes to luxury watches.
Wood is still ‘constructive’ in India.
“The most obviously positive point, from a stock market perspective, is that the monetary tightening cycle has ended with inflation falling in recent months,” he wrote.
Headline inflation in India has fallen to 4.7% in April and is seen to fall further to 4% in May.
Wood sees inflation averaging 5% this fiscal year and expects a cut in policy rates later this year or next year.
With the monetary policy tightening cycle over, “there is no obvious near-term trigger for a further downgrade in the valuation, except for market action outside of external risk,” he wrote.
According to the note, Indian equity markets at a one-year price-to-earnings ratio are at 18x, slightly above the 10-year average of 17.4x.
“Foreigners have also returned as net buyers of Indian stocks of late as they have pulled back from China,” Wood said.
After selling $4.5 billion worth of net Indian stocks in the three months to February, foreigners have bought $7 billion worth of stocks since March.
Report by Ira Dugal; Editing by Sohini Goswami
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