India’s Prime Minister dropped a bomb when he announced demonetisation of high-value currency notes on the eve of November 08, 2016. Many experts believed he was skating on thin ice. The subsequent policy flip-flops fueled their belief even more.

Ironically, the move that didn’t gather support from far-famed economists, received prop from the masses.After all, the rich were seen scurrying around to salvage their unaccounted wealth, possibly for the first time.

Nine months on, the moot question is, has it delivered the desired results?

Until recently, the answer of what the economy had gained from demonetisation with facts and figures remained ambiguous.

The report titled ‘Mint Street Memo No. 01 Demonetisation and Bank Deposit Growth’ authored by RBI officials attempts to solve this mystery. It estimates that demonetisation funnelled approximately Rs 2.8 lakh crore to Rs 4.3 lakh crore into the banking system. And, it believes Rs 1.6 lakh crore to Rs 1.7 lakh crore may stay within the system permanently.

In conclusion, the report states, “Overall, there appears to have been a significant increase in bank deposits due to demonetisation, which if sustained, could have favourable impact on financial savings and their channelisation to capital markets.”

Change in investment choices…

Demonetisation perhaps has set the wheels in motion and has promoted attitudinal shifts among investors. Physical assets are losing their nimbus, and financial assets are gaining more popularity. Another report on this subject titled, ‘Mint Street Memo No. 02 Financialisation of Savings into Non-Banking Financial Intermediaries’ highlights this transition, and reveals additional information.

It says, “An important positive impact of demonetisation has been to induce a shift towards formal channels of saving by households. During demonetisation and the subsequent period, there has been a distinct increase in saving flows into equity/debt oriented mutual funds and life insurance policies. Apart from this, non-banking financial companies (NBFCs) seem to have been positively impacted in terms of collections and disbursals.”
 

Demonetisation impact on mutual fund investments
The graph denotes the cumulative net inflows into mutual funds
(Source: Report titled ‘Mint Street Memo No. 02 Financialisation of Savings into Non-Banking Financial Intermediaries’)
Similarly, the premium collections of private life insurance companies recorded a hefty growth of 20.4% on Year-on-Year (Y-o-Y) basis between November 2016 and June 2017. Over a similar time frame, premium collection of LIC jumped 16.1%.

Conversely, the Non-Banking Financial Companies (NBFCs) witnessed a sizable growth in their loan recoveries. The average monthly collections of Asset Finance Companies (AFCs) increased 7.4% between November 2016 and June 2017 over the average collections recorded between April 2016 and October 2016. On the same parameter, Loan Companies (LCs) saw a massive 21.7% growth.

In conclusion, the report says, “Demonetisation appears to have led to an acceleration in the financialisation of savings. In parallel, there is a shift towards greater formalisation of the economy in the near term aided by the introduction of goods and services tax (GST) and regulations such as the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Benami Transactions (Prohibition) Amendment Act, 2016. These developments may also incentivise greater shift from physical to financial savings. The continuing weakness in real estate activity and moderation in housing prices are also likely to further help channel funds away from physical assets into financial savings. Finally, the recent deceleration in inflation, as also, inflation expectations, has had the effect of raising real incomes and returns for households, which may provide further impetus to financial savings.”

Stronger economy, greater political stability, and expectations of a revival in the corporate earnings may continue to be the positive points for investing. Nonetheless, avoid any speculation on the movement of stock market indices or interest rates. Your risk appetite and investment horizon should guide your investment decisions. If you decide to invest in mutual fund schemes, do your homework. Stick to mutual schemes with a proven track record.

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