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Indian Demonetization Saga – 2016

What Happened?

On November 8, 2016, Prime Minister Narendra Modi addressed the nation to communicate the ban on high
denomination ₹500 and ₹1,000 currency notes effective from 9th November. The ₹500 and ₹1000 notes, which account
for 86% of currency in circulation, ceased to be legal tender. Almost ₹14 lakh crore ($207 billion) was swept away at
midnight after the Prime Minister’s announcement in an effort to curb black economy, corruption and circulation of
counterfeit notes.

How does it affect?

Demonetization affects the currency availability of every Indian citizen as it acts as a liquidity shock. It means that people
will not be able to transact with most used ₹500 and ₹1,000 notes for their day-to-day needs, causing a reduction in
consumption, investment, production, etc. The government’s sudden decision is also causing inconvenience to all
citizens, who are queued up outside bank branches to deposit or exchange their old currency (while some are finding
ways to convert black money to white). However, the negative effect of the initiative is expected to last for 2 quarters
post which it will significantly dampen. According to World Bank estimates, only 53% of the Indian population is part of
the banking system, of which many accounts have been added as a part of the Jan Dhan Yojana. From an operational
perspective, 33.33% of bank branches are in Tier-I and Tier-II cities, which puts the rural population at a distinct
disadvantage.

Why such a step?

Demonetization is a monetary policy tool, which has been used to address three problems in one go viz., black money,
corruption and counterfeit currency circulation.

The other intention of this bold move was to reduce corruption and misuse of currency for political campaigns.
According to RBI’s Annual Report of 2015-16, cash circulation has gone up to 15% vis-à-vis 10.7% in the last 3 years. This
uncharacteristic spurt in currency circulation raised some alarm bells. Demonetization was also an attempt to curb this
misuse of currency ahead of the state elections of 2017. Finally, the three-stroke agenda was also targeted towards the
rise in counterfeit currency and terrorist financing. Most of the terror related activities are financed through cash of high
denominations. A ban on these notes will choke the finance channels for proliferation of unwanted activities.

Positive outcome of such a step

Some of the positive effects of the move are rise in tax collection, increase in utilization of Jan Dhan Yojna accounts
there by a rise in financial inclusion, fall in interest rates both deposits and lending which would thereby shift the
attention towards high yield investments like stocks/equity markets, high bond yields & many others to follow.

Side Effects of Demonetization

Rural economy fractured since 47% of population is not linked to banking network. Also, cash transactions amount to 80
per cent of total transactions. Informal Sector accounts form 45% of GDP and 80% of employment; Potential crash in
some sectors may impact growth. Black money hoarders find ways to divide their hoard into many smaller pieces and
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get them remonetized again. Political opposition to this move may delay GST implementation, which would be another
disruptive change in CY17.

For a detailed story about this move and its impact across various sectors refer the link given below:
Credence Capital - Report on Demonetization

Trump Presidency and Macroeconomic Impact: Impact on the US Economy

Higher Infra spending, tax cuts, Higher GDP and Inflation, Higher Interest rates: Major expected policy decisions
expected are - improvement of public Infrastructure and tax cuts for Corporations. These policies will have a severe
impact on the budget deficit which could even double from the present levels of approximately 3% of GDP. But, Trump
believes that tax cuts and additional public spending will lead to faster growth of the economy, which will in the long
term take care of the deficit and the debt. To prevent an outbreak of inflation, the Federal Reserve is expected to
increase the interest rates more quickly.

Financial regulations: Reduce the restrictions on the financial sector and also talked about dismantling the Dodd-Frank
rule. He might also increase the deadlines for implementation of Basel norms. As a result, in expectations, the share
prices of all the financial sector companies have risen significantly.

Immigration: The number of illegal or undocumented immigrants may be close to 11 million, and Trump has time and
again stated that he would deport them from US. This could lead to a sizable reduction in the country’s labor force,
which in turn could result in reduction in both actual and potential GDP growth. Also the cost involved in the process
would be massive, which according to some estimates can be anywhere between $100 billion to $300 billion.

Impact on Global economies

Mexico: Peso has plummeted by more than 12%. This comes amidst Trump’s intent to impose a 35% tariff on all
Mexican manufactured auto exports to the U.S along with his denunciations of the NAFTA as the worst deal ever made
and that it needs a complete renegotiation.

India: Trump clarified that he was against only unskilled, illegal and Muslim migrants and would welcome skilled and
educated immigrants. So, this plays possibly as an opportunity for skilled Indians, entrepreneurs and students to the
United States. Trump’s hard stance against China, Pakistan and terrorism can play a key role in the Indian-American
relationship, finding more avenues for partnerships.

China: Trump said that he will- label China a currency manipulator, will bring cases against Beijing to the World Trade
Organization, and consider imposing a 45% tariff on Chinese imports into the US to make it easier for American
companies to compete. There would be a risk that aggressive US trade policy could result in a marked slowdown in
China’s growth and a loss of manufacturing jobs. Beijing is not without economic weapons either, since it has amassed a
vast stock of US Treasury bonds in recent years, the proceeds of its trade surplus with America and Beijing could dump
US assets. A tit-for-tat trade war in which China puts tariffs on US exports cannot be ruled out either.

Market’s reaction to Trump Presidency

Everybody across the globe was sure about 1 thing, if Trump pulled off an upset win, it would create panic reaction in
the global markets, a drop in stock prices and risky assets and a rally in bonds and other safe haven assets. But what
happened post him winning the elections, was the exact opposite. As on 25th November 2016, the US 10-year Bond
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yields have risen to 2.36% from 1.85% as on November 8, and the bond markets sold off. All the three major US indices
(S&P, NASDAQ and Dow Jones) are trading at their all-time highs and Dow Jones index is up nearly 5-6% points and is
trading above 19,000.

Clearly, the world markets are currently taking a one side view that ¬ Trump is better for US growth and bad for world
trade. Essentially, markets are signaling that investors think the Trump administration will follow through more
completely on the plans that are positives for growth and profits and will be more cautious on those policies that are
negatives.

For detailed report refer the link attached below:

Credence Capital - Report on Trump Presidency