Modi cash ban ushers worst November since 2011 for rupee, stocks

People queue to exchange and deposit their old high denomination banknotes outside a bank in Guwahati, India November 12, 2016. — Reuters pic
People queue to exchange and deposit their old high denomination banknotes outside a bank in Guwahati, India November 12, 2016. — Reuters pic

MUMBAI, Nov 30 — Indian stocks and the rupee capped their worst November performance in five years as investors grapple with the economic impact of the government’s currency recall and a potential increase in US interest rates.

The currency tumbled to a record low last week as emerging markets sold off on concern Donald Trump’s reflationary policies will mean a quicker pace of monetary tightening by the Federal Reserve. Indian sovereign bonds climbed the most since 2009 this month as a banking system awash with cash boosted demand for debt. Volatility spiked across all three asset classes.

The S&P BSE Sensex slumped 4.6 per cent in its biggest monthly drop since February, with shares of automakers and consumer companies leading the declines. The rupee dropped 2.4 per cent to 68.3875 per dollar in Mumbai, its worst performance in 10 months.

“We expect some more weakening in the rupee as the dollar is on a structural upmove,” said Navneet Munot, Mumbai-based chief investment officer at SBI Funds Management Pvt, which oversees 1.32 trillion rupees (RM85.9 billion). Stocks may remain volatile as investors adopt a cautious tone ahead of events from a referendum on constitutional reform in Italy to the monetary policy reviews by the Federal Reserve and the Reserve Bank of India, he said.

Foreign holdings of Indian government and corporate bonds dropped 148 billion rupees in the month through November 29, set for the biggest decline since June 2013, National Securities Depository Ltd data compiled by Bloomberg show. Overseas investors withdrew a net US$2.6 billion (RM11.6 billion) from stocks as speculation Trump will take a more protectionist approach to trade also weighed on developing-nation assets.

The cash crunch triggered by Prime Minister Narendra Modi’s November 8 move to withdraw high-value currency notes may drag down gross domestic product in the year to March by 0.5 percentage points, according to Citigroup Inc. A report today may show expansion probably accelerated to 7.5 per cent in July-September, according to the median of 25 estimates in a Bloomberg survey of economists.

‘Good opportunity’

“Discretionary spending will bear the brunt of the crackdown on unaccounted money, though a correction in stocks due to these concerns will offer a good opportunity,” SBI’s Munot said.

As citizens rushed to submit and exchange their defunct currency notes, more than 8 trillion rupees was deposited into banks between November 10 and November 27. Bets that some of these funds will be used to buy bonds sent the benchmark yield to a seven-year low. With money-market rates also tumbling, the central bank resorted to extraordinary measures to prevent the excess liquidity from threatening India’s financial stability.

While that hurt the bond rally, the yield on notes due September 2026 still ended down 55 basis points this month, the biggest decline for a benchmark 10-year security since April 2009. November’s gains have also been supported by expectations that policy makers will lower benchmark interest rates at next week’s monetary review. Consumer prices rose 4.20 per cent in October from a year earlier, the smallest pace of increases since August 2015.

Bankex rally

The Sensex jumped 1 per cent today, capping a fourth day of gains, as lenders and consumer stocks rallied. The S&P BSE Bankex gauge climbed 2.2 per cent, the most in three weeks. The 10-year yield declined seven basis points to 6.24 per cent, while the rupee strengthened 0.4 per cent in a second day of advance. The currency sank to an unprecedented 68.8650 per dollar on November 24.

“The rally in the recently beaten-down bank stocks will continue until the RBI policy meeting today as investors place their bets on the quantum of the expected rate cut,” said Hemen Kapadia, Mumbai-based senior vice president for institutional equities at K.R. Choksey Shares & Securities Pvt. “The market has priced in a 25-basis point cut and about the same quantum of increase in US rates. Anything else will be a surprise.” — Bloomberg

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