Note ban likely to fuel volatility in markets: Citigroup

"This event, along with US election results coming out now could result in short term volatility in the markets," Citigroup said in the research note adding "however, we do expect longer-term positives for equities".

By Author  |  Published: 9th Nov 2016  3:09 pm
Note ban
Indian man sorts 1000 and 500 rupee Indian currency notes at a fuel pump in Ahmadabad, India. India's highest-denomination currency notes are being withdrawn immediately from circulation, the country's prime minister said on Tuesday night, Photo: AP

New Delhi: Government’s move to ban Rs 500 and Rs 1,000 notes is expected to have a positive impact on the economy in medium to longer term, however, there could be some short-term volatility in stock markets, Citigroup said in a report.

According to the global financial services major, the potential impact of the government’s move on certain sectors like real estate, housing finance, banks, fintech/payment space and consumer discretionary space is expected to fuel volatility in the markets.

The Sensex opened sharply lower at 26251.38 points on Wednesday morning and moved further down within seconds to touch a low of 25902.45 points — down 1,689 points from its previous close — with all 30 stocks from the benchmark index trading deep in the red.

In a bid to fight against black money, fake currency, corruption and terror financing, Prime Minister Narendra Modi last night announced demonetisation of Rs 1,000 and Rs 500 notes with effect from Wednesday.

The key sectors that could be impacted because of this move are real estate (likely near-term negative demand impact), housing finance companies (likely near-term negative impact) banks (positive for deposit growth but could result in negative impact on margins given the slow loan growth).

Meanwhile, rural focussed NBFCs could see near-term impact, while segments of consumer discretionary will likely be negatively impacted.

As per various estimates, the size of the parallel economy in India is estimated at more than 20 per cent of GDP and the stock of existing Rs 500/1,000 notes accounts for over 85 per cent of the total currency in circulation.

“Apart from the operational/logistics challenge in the conversion of this massive amount in a relatively short period of time (50 days), what we do not know at this point is how much of it will even come up, which will depend on the kind of scrutiny,” the report said.