The month gone by witnessed two unprecedented events; Indian government banning the circulation of 500 & 1000 denomination notes and victory of Donald Trump in US's Presidential election. The decision of demonetization was made to unearth black money, curb the financing of terrorism and curtail counterfeit currency. We might see a shift from cash economy to a cashless economy. In short term, we might see surge of liquidity in banks and it is nticipated that rates may come down. To absorb sudden influx of liquidity, RBI's announced increase in CRR to 100% on incremental deposits.. RBI noted that applying an incremental CRR is a temporary measure and is in discussion with government to increase limits on Market stabilisation Scheme (MSS), which could be used to absorb excess liquidity through issue of short term instruments. From a long term perspective rates are likely to soften on back of this move. The GST council decided on a 4 tier tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and demerit goods. Luxury & de-merit goods would also attract an additional cess. On global front, with Donald Trump coming to power it is expected that US economy will see tax cuts and increased infrastructure spending which could be re-inflationary. OPEC reached a deal to cut oil production by 1.2 million barrels per day in order to raise global prices. However, uncertainties of the said deal still prevail as it depends on production cuts by non-OPEC countries and developments in US shale oil market.
Equity markets were impacted negatively by global and domestic events in the month gone by. On November 8, 2016, the Indian government announced that the banknote of INR 500 and INR 1,000 would cease to be legal tender. The immediate effect of the move, on a country driven by cash economy, was seen as inconvenience caused to the masses, but this move would clean the complete economic system, increase the size of economy and revenue base amongst other benefits as cited by the government. In shorter term, this may negatively impact the sectors which depend on cash transactions and have a rural presence. In the longer run, it might help the unorganised sectors becoming more organised which was also the intention of the government while it proposed the Four Tier GST structure ranging from 5% to 28%. Apart from concerns about demonetisation, Donald Trump's victory and concerns about his restrictive trade philosophy led to foreign investors pulling out of Indian equities. Heavy selling by foreign investors also led to the Indian currency depreciating against the US Dollar. Increase in inflation and other positive data and sentiments hint towards a fed rate hike in the upcoming FOMC meeting in Dec'16.
During the month of Nov'16, investors around the globe were surprised by the twin events of demonetisation of high value notes by the government of India and Donald Trump's victory at the US presidential election. Market participants in India seemed to be more concerned about the uncertainty around India's growth prospects as the GDP as well as the external trade environment are expected to get impacted negatively on the back of changes in US bilateral trade agreement post Trump's victory. Domestically on the back of unexpectedly excess liquidity, easing inflation and the dovish policy stance by the RBI, the 10 yr G-Sec Yield moderated by 55bps from 6.79% on 28th Oct'16 to 6.25% on 30th Nov'16. INR weakened on overall USD strength on an expectation of a rate hike by the US Federal Reserve in December. Further expectations that new administration under Trump is likely to use fiscal stimulus to boost US economy, thereby increasing inflation and growth also supported the dollar. For the month of Nov'16, FPI net outflow was around Rs 19,500 crs whereas, Mutual Fund invested around Rs 9150 crs*. On the global front, post the election results, the US 10 year hardened 55bps to 2.38% at the month end from 1.83% on 31st Oct'16. European council awaits sustainable inflation numbers before taking any key decision on QE before the crucial ECB meeting in the upcoming month.