Street faces short-term note ban setback

The government has demonetised Rs 500 and Rs 1,000 notes effective November 9. As per the official data, Rs 14 lakh crore out of Rs 16 lakh crore worth currency issued  by the Reserve Bank of India (RBI) were  in the  denominations of Rs 500 and Rs 1,000, till March 2016. This works to out to about 10.5% of GDP.

From the stock market’s perspective, there will be a short-term negative impact across sectors. The consumption story, which was driving stocks, will face headwinds in short term. 2HFY17 results for several sectors will likely get negatively impacted. However, in the long run, the market will witness several long-term benefits from this move.

Real estate and jewellery sectors which have high cash dealings will come under pressure. Retail sector will also witness a negative impact in the short-term.

Auto, cement and other home improvement sectors will also face headwinds in the short-term. Overall, discretionary spends will witness slowdown. We note that real estate, retail trade, hotel and restaurant constitute 30% of GDP. Housing Finance Companies, except those exposed to salaried class, will stand to lose.

Other sectors which have higher unorganised component, will witness slowdown as cash usage declines. However, the organised players in these sectors are in a sweet spot now.

The banking sector may face delays in repayments in shortterm. However, additional CASA and likely reduction in interest rates will be the long-term positives. We expect government to spend aggressively on infrastructure.

The writer is senior vice president and head - PCG Research, Kotak Securities