Decoding Demonetisation Impact On Key Asset Classes

Over the last one week, ‘Demonetisation’ has suddenly become the most used word in India. Everyone, right from day labourers to celebrities are not shying away from analysing the impact of this phenomenon as per their own understanding. Everyone has a say on the subject, which in itself, proves the widespread impact of this drive on the general public. 

Before moving ahead on the outcome of demonetisation exercise on various financial assets, it will be relevant to know what exactly is demonetisation. 

“Demonetisation is withdrawal of currency as an official mode of payment.”

Although demonetisation could disproportionately affect the various income groups of India in many ways, the recent one was mainly targeted at unaccounted cash holders. Also, the move was to disrupt fake currency circulation by terror groups. 

Let's take a brief look at the impact of demonetisation across key asset classes. 

1. Equity Market - Demonetisation could have eroded the optimism from equity markets on short-term, but it may not hurt equities over long-run as the market digests the uncertainty triggered by the move. However, some of the sectors are likely to underperform, given their dependency on the unorganised economy. Despite this, the move should not at all deter long-term equity investors, who might come across several buying opportunities in the coming days and months. 
2. Real Estate - Real estate sector, which is notoriously known for high-value cash transactions and involvement of black money in tier II and III cities, is certainly going to take a hit, following the Demonetisation move. This asset class might see a steep correction as many of the investors, who would have planned to reap profits by investing unaccounted cash, would withdraw from the system. However, projects undertaken in Metro cities are not likely to face the heat as this fragment has already shifted to the organized system long back.  The liquidity crunch might haunt the sector for a while, but transparency in the sector is apparent that will benefit legitimate investors in future.Over and above, expected drop in home loan rates following demonetisation is also seen positive for the sector. 
3. Debt Market - The return potential and attractiveness of debt market has only improved following the demonetisation move. Inflation is likely to ease, which will provide room for the Reserve Bank of India to cut policy rates, thereby, leading to higher bond prices. Under the present scenario, debt investors might benefit the most from several positive aspects that come into play for this asset class alongside rate cuts. 
4. Gold - The asset class made the most of the Demonetisation move and is likely to retain its glitter in the upcoming days. The sudden abandoning of high-denomination currency by the government has once again reinforced the public’s faith in the yellow metal. Gold will continue to be among the most preferred investments for Indians, who await more bold steps from the Government during its tenure. 

In a gist, the cessation of currency will have only little impact on digital-savvy investors and they can continue to move ahead with their planning as usual, unfazed by the recent chain of events. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Like us at https://www.facebook.com/Inverika/