Retail investors took MF AUM to record $325 bn post demonetisation

Saurabh S JainSSJ Finance & Securities

A year since Prime Minister Modi announced demonetisation of nearly Rs 15.44 lakh crore of cash on November 8, 2016, we are able to introspect on some of the implications of such a massive exercise that was touted to root out illicit money.

A caveat needs to be added here that the true implications of such a massive exercise, be it on the country’s political, economic or behavioural front, may take years or even decades to be evaluated.

As per RBI records, nearly 99 percent of the cash was deposited back into banks thus bringing all the money into the mainstream banking system and leaving banks flush with funds.

An immediate benefit that demonetisation has given is the fall in interest rates after the influx of liquidity—this has helped borrowers and correspondingly hurt savers.

The cash-to-GDP ratio is now down to an estimated 9.7 percent, from 11.3 percent pre-November 8 last year. This cash is now in the banking system, which allows them to lend and invest more, and at lower rates.

Another obvious beneficiary has been the capital markets. Previously, black money used to get invested in hard assets like property and gold.

Post demonetisation, generation of black money was curtailed to large extent by the government agencies keeping an eye on the cash transactions and a change in people’s mindset in hoarding cash fearing penalties.

People have thus been forced to start making investment and capital deployment decisions purely on the merit of returns. In the absence of investment opportunities in better yield earning assets, a large part of the liquidity has been diverted to Mutual Funds.

In last one year, mutual funds have purchased equity worth Rs.96,483 crore from the secondary markets which have helped markets scale new high in spite of FII’s selling equity worth Rs 60,968 crore during the same period.

Further, the primary markets have also seen the capital raising of more than Rs 400 billion in the year to date. The Mutual Fund industry AUM has now swelled to a record USD 325 billion driven largely by strong retail participation.

This does not seem like a one-off event but appears more of a long-term structural trend. It is evident that liquidity is at play in the capital markets as despite a slowdown in growth from pre-demonetisation GDP growth rate of 7 percent to below 6 percent in the last calendar quarter of April-June 2017.

The Indian markets now trade at historical highs with Nifty trading at a PE of 26.9x TTM basis compared to PE of 22.5x TTM prior to demonetisation, with banks and NBFCs being major gainers.

With GST and other reforms, we believe the organised sector will grow at a faster rate than unorganized sector justifying higher PE.

Even if demonetisation may have created a temporary slowdown, the long-term impetus that may arise through formalisation of the economy, larger tax base, digitisation, better fiscal situation and improvement in ease of doing business in India, can provide huge triggers to the economy in the long run.

Disclaimer: The author is MD, SSJ Finance & Securities. The views and investment tips expressed by the investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.