Demonetisation and You !!

Writing about the hottest topic could be a difficult job. Many things are already being “analysed” and discussed all around.

Since this space is among the favourite platform of its readers for Personal Finance, I will try and keep away from talking about the politicisation of this move. As usual, we will stick to the WIIFM (Whats in it For Me ?) principle.

We have just picked up some asset classes and we will see how do they get impacted in the short term and in the long term due to Demonetisation.

  1. Debt

Short Term: In the Short term, cash liquidity has dried up from the market, whereas banks seem to be flooded with Cash (mostly old currency). This currency can (hopefully) be used by banks as CRR when they give it to RBI.

This will bring down the immediate liquidity requirement of the banks which will push them to reduce interest rates on FDs.

Loan becoming cheaper in the short term could be difficult as they ideally need to use the new currency for disbursement to people waiting to withdraw.

Long Term: In the Long term, when most of the cash holdings (I am sure most of us would agree that all cash still wont come in banking system) are in banking system, we could see loans becoming cheaper.

Strategy : This could mean lower interest rates will be offered across various fixed income instruments like FD, PPF, G Sec, Post Office etc. A fall in interest rates could very well benefit investments in Debt Funds. Thus, whoever is willing to invest from a 1-3 years time frame, can start looking at Debt funds.

  1. Forex / USD

Short Term: Some big cash hoarders (whether black or white) are also trying to convert their old currency into USD or other Foreign currencies. This has pushed up demand for dollar and thus we are seeing the dollar appreciating. Among other factors, an anticipation of hike in Fed rates is also putting pressure on FIIs to sell which is again pushing up demand for dollar. Thus, we could see dollar continuing to appreciate in short term.

Long Term: Assuming that a substantial chunk of cash (in Indian Rupee) will be destroyed as we see lot of incidences of people burning old currency etc, we can again see a bounce bank in rupee to some extent. Fundamentally, as long as there is a difference in inflation rates of India and US, the rupee will continue to depreciate by 4-5% p.a. so as to keep our exports competitive. But the additional fall which we see in the short term, might get reversed to some extent in the medium to long term.

Strategy: Those planning to “invest” in dollars need to be cautious or be happy with a 4% p.a. kind of returns.

  1. Gold:

Short Term: Similar to dollars, some cash hoarders queued up to buy gold and the prices started rocketing. However, there have been fear propagated (both genuine and fake) that Gold also might get traced and could be a cause for trouble for those holding Gold in unreasonable quantities.

Long Term: There seem no other fundamental reasons for Gold to rally at an unreasonable rate. In fact, those who are buying Gold at 40-50% premium could be stuck with it as the spike might subside in the medium to long term.

Strategy: Gold can continue to be a 10% part in your portfolio. Also, from a long term perspective, you should be regularly investing in Gold irrespective of the price levels. Timing the Gold prices can go both in favour or against you. Better to be a regular investor with a long term view.

  1. Real Estate:

Short Term: Real Estate is usually believed to be the favourite “parking space” of black money hoarders. There are possibilities that Real Estate sales start happening in this period (till 30th December) wherein hoarders of black money hastily buy properties, thinking that this will help them to get rid of the black money held in old currency. This could cost them a premium as the sellers also know their weakness.

Long Term: With lot of money coming into the system and black money reducing to a great extent, the artificial demand of Real Estate will dry up. The natural demand will prevail which may not yield ultra-high returns (as seen few years back). In fact, those buying real estate in haste in the short term, will be stuck with it for quite some time. They can just psychologically console themselves that they saved some tax and penalty.

Strategy: Don’t buy useless properties to dump black money. Few years later, you will realise that to save 40-50% tax, you bought a property at an unreasonable price, and you might take years to get rid of it. Instead, paying tax could turn out to be a better option. For future, you can start investing in instruments which give you good returns and still don’t increase your tax liability.

Those with genuine white money, can wait for some time as we could see a 30-40% drop in property prices.

  1. Equity:

Short Term: In Short term, there could be confusion and panic which could mean negative returns / flat returns in equities. Also, due to dynamic changes happening, any news can see overreaction by the markets. Even fundamentally, consumer spending can be lower due to lower availability of cash. This could impact the quarterly results of the companies in short term.

Long Term: In Long term, we can expect more rationalisation of taxes which could increase corporate profitability. Also, the additional taxes mopped up due to demonetisation could either be used for higher infrastructure spending or to lower the taxes (hopefully). This would mean more post-tax money with the people resulting more money being invested in equities.

Strategy: Equities anyways shouldn’t be used for short term investments. Those with long term time horizon, can start investing in equities. If one doesn’t have an expertise for equities, seeking professional help would be helpful.

  1. Cash (in Indian New Currency):

Short Term: There could be a natural question that why shouldn’t I hold a lot of cash (in new currency) rather than investing it here and there. In the short term, you may not have this option very easily as it will take some time for the new currency to circulate in abundance.

Long Term: This Demonetisation could be a wake up call for those who are traditionally habituated to hoard lot of cash. We never know if after 3-4 years, the new note of Rs. 2,000 might also be declared invalid (I don’t have any authorised news about this. Its just my own hunch looking at the paper quality of the new note, that it is not made to last too long). In that case, your entire exercise could be prove futile.

Strategy: Cash anyways keep losing its value due to inflation. We need to just keep a bare minimum cash needed for our household expenses (plus a little amount for emergencies). But just piling up cash is going to be a big pain as we move towards a more transparent and cashless economy.

Overall, Demonetisation could be big game changer for the Indian Economy. Whether the game changes for our good or bad, depends on how wisely we take our investment decisions.

We look forward to your valuable comments and feedback.

The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP) is CEO with Nidhi Investments, Mumbai. He may be contacted on if you have any questions.

Disclaimer: The above points and suggestions are personal opinion of the author. They may differ in application from person to person. Please consult your financial advisor before making any investment decisions.







Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of and as Investment Expert. He is actively involved in investor education through his blog which has a readership from 78 Countries all over the world. His articles are also regularly published in , , ,, and . He has been awarded the title of “Best Article Writer” from in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

8 thoughts on “Demonetisation and You !!

  1. About your remarks on CRR : The RBI has impounded the entire incremental deposits of banks in CRR which gives zero return to the banks , but on which the banks have to pay interest at 4% (to 7% depending on the banks) as these deposits will be in SB accounts. Thus the banks will be saddled with huge losses due to this interest payments in addition to having suffered torture while handling the whole process. The entire blame is on the RBI which had no plan to handle an emergency of this size and is totally at sea. Because they don’t know anything about actual handling of cash ( apart from distributing it wholesale to the banks.) Retail handling is done by the banks who are doing a commendable (but thankless) job and getting the brickbats thrown at them by the public, Here again only the public sector banks have borne the brunt of the attacks. In short instead of getting a suitable compensation for handling the whole mess, the banks are penalised by the RBI. Since the additional deposits will not be with the banks, the reduction in interest rates does not arise.

    1. Thanks for your valuable comments Sir.

      We usually avoid putting the blame on any entity in our articles, coz we believe that it doesnt help. Rather, we focus on what we can do towards our benefit.

      The reduction in interest rates (on deposits) has already started and we expect further reduction. But your views are well taken.

      Thanks again for your visit and feedback. Looking forward to more in future.

  2. Very Good Perspective ! Lets see how it turns out to be !
    Because we just don’t know whether this decision is due to Genuine Terrorist Financing /Black Money Problem OR is it done just to Save Banks (from alarming NPA) by giving long time (Remember this decision was taken overnight and without preparation of ATMs).

    1. Thanks for your valuable comments Sir.

      I would say, we really dont know whats the real motive behind this. We just hope it should be good.

      But we can certainly analyse the fallout of the same on different asset classes and decide our strategy.

      Thanks again for your visit and feedback. Looking forward to more in future.

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