Domestic equity inflows could double to $ 55 billion due to Demonetisation, says Citi
MUMBAI: Even this could be an implication of demonetisation. Global research house Citi believes the flow of domestic money into India’s equity markets may double during the next financial year (FY) to $ 55 billion compared to the $ 28 billion during FY 2016-17.
“The cumulative mutual fund buying has been increasing steadily and demonetisation has added to that momentum,” Citi research analyst Samiran Chakraborty and Anurag Jha said in a note.
The Citi research note says that the stickiness of banking system excess liquidity has surprised them and increased money flow into stock markets could be one of the few possibilities as a result of this.
Domestic mutual funds received net inflows of Rs 1 lakh crore in three months post demonetisation, with Rs 21,000 crore going towards equity funds. Inflows to equitymutual funds were drying up after mid-2015 as the equity markets were in a range.Demonetisation seems to have changed the pattern as household financial savingsin the form of cash is getting channelized towards other assets, the Citi report noted.
The research note further said that the steady increase in household financial savings and a rising proportion of stocks/bonds in the household financial asset base creates a strong tailwind for domestic flows into markets. If the trend continues for two more years, and assuming that gross financial assets were to increase to a pre-crisis level of 13.8% of GDP (avg FY00-FY08, FY16 at 11.1% of GDP) and shares & debenture share increased to close to its peak of 9% of GFA (seen in FY08, FY16 at 6.1% of GFA), then the domestic flows into stock markets (mostly) could increase to US$55bn over FY18 -FY19 period. This compares to a flow of around US$28bn in the FY16-FY17 period.
If such level of domestic flow s were to materialize, it could insulate the volatility in markets from the stop start nature of foreign investment flow, the research report said.
The liquidity deluge during the two months of de-monetization (Nov-Dec) was only partly reversed in the two months of re-monetization (Jan-Feb). Currency in circulation dropped by Rs 8.6 lakh crore in Nov-Dec period whereas the increase in currency in circulation was around a fourth at Rs 2.3 lakh core in Jan-Feb. As a result, the banking system liquidity has remained in surplus of over Rs 6 lakh crore as against the RBI’s stated stance of “neutral” liquidity. The slower pace of re-monetization (including due to structural shift towards compliant/less cash economy with more digital payments) suggests that the banking system could remain in surplus in the entire first half of 2018.
“The cumulative mutual fund buying has been increasing steadily and demonetisation has added to that momentum,” Citi research analyst Samiran Chakraborty and Anurag Jha said in a note.
The Citi research note says that the stickiness of banking system excess liquidity has surprised them and increased money flow into stock markets could be one of the few possibilities as a result of this.
Domestic mutual funds received net inflows of Rs 1 lakh crore in three months post demonetisation, with Rs 21,000 crore going towards equity funds. Inflows to equitymutual funds were drying up after mid-2015 as the equity markets were in a range.Demonetisation seems to have changed the pattern as household financial savingsin the form of cash is getting channelized towards other assets, the Citi report noted.
The research note further said that the steady increase in household financial savings and a rising proportion of stocks/bonds in the household financial asset base creates a strong tailwind for domestic flows into markets. If the trend continues for two more years, and assuming that gross financial assets were to increase to a pre-crisis level of 13.8% of GDP (avg FY00-FY08, FY16 at 11.1% of GDP) and shares & debenture share increased to close to its peak of 9% of GFA (seen in FY08, FY16 at 6.1% of GFA), then the domestic flows into stock markets (mostly) could increase to US$55bn over FY18 -FY19 period. This compares to a flow of around US$28bn in the FY16-FY17 period.
If such level of domestic flow s were to materialize, it could insulate the volatility in markets from the stop start nature of foreign investment flow, the research report said.
The liquidity deluge during the two months of de-monetization (Nov-Dec) was only partly reversed in the two months of re-monetization (Jan-Feb). Currency in circulation dropped by Rs 8.6 lakh crore in Nov-Dec period whereas the increase in currency in circulation was around a fourth at Rs 2.3 lakh core in Jan-Feb. As a result, the banking system liquidity has remained in surplus of over Rs 6 lakh crore as against the RBI’s stated stance of “neutral” liquidity. The slower pace of re-monetization (including due to structural shift towards compliant/less cash economy with more digital payments) suggests that the banking system could remain in surplus in the entire first half of 2018.
