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Excerpts

Demonetization-What is Clear

What is clear is as follows:

1. Banks will benefit, as much of this ₹ 15 lakh crore in currency will get deposited. Even if only 10 % remains with the banks it means an incremental ₹ 1.5 lakh crore of current and savings account ratio (CASA). Interest rates are headed lower system-wide as banks’ cost of funds decline, they lower rates and park these flows into government paper. Already we have seen Indian 10-year yields fall by 40 basis points in the last week, despite yields rising globally. Also remember this money left with the banks will have a multiplier compared to it sitting in cash. The system should be awash in liquidity.

2. The Reserve Bank of India (RBI) will cut rates sharply and quickly. This reduction in currency will be a deflationary shock, with certain asset markets declining sharply and economic activity weak for the next two quarters at least. Inflation will decline giving the RBI the space to cut.

3. Financialisation of savings will accelerate as both property and gold will now be challenged as alternate stores of value. The cost of capital will reset downwards for the country.

4. There will be a significant negative wealth effect. Some percentage of this ₹ 15 lakh crore will get wiped out. Black money that is either simply burned, or loses 30-40 per cent as the cost of conversion to legitimate money. Wealth destruction is also inevitable in property, as prices fall and markets freeze. There will be a shock to high end-discretionary consumption.

5. There is likely to be some behavioural change as those parts of the economy relying on cash need to adjust. Individuals and business that were using large chunks of cash on a daily basis will take months to rebuild these cash levels given the limits on daily withdrawals. In the interim, they will have to adopt e-payments or cheques to stay in business. As their business moves into the formal economy, it will be difficult to reverse and the tax buoyancy of economic growth will improve for the government.

6. For the vast majority of Indians, those having less than ₹ 2.5 lakh in cash or agriculturalists, things will normalise in a few weeks. They will simply need to wait till they can get the new notes. For these people, it is largely a logistical issue of note replacement.

7. Small and medium-sized enterprises (SMEs) will be in trouble. Many are doing business entirely in cash. Demonetisation, combined with goods and services tax (GST), will kill their business model, which was dependent on tax and labour arbitrage. Many sectors will see large market share gain for the organised players. Lenders to the unorganised sector will need to stress test their exposures; there may be far greater credit issues here than investors are modelling.

8. Expect more measures to tackle the flow (fresh creation) of black money. Demonetisation handles the stock problem. Once the short-term logistics around cash replacement are fixed, expect new restrictions on use of cash and continued curbs on cash withdrawals. These steps will continue to force behavioural change.

9. I am frankly quite amazed as to the extent of cash in the system and its all pervasiveness. It seems that there is no supply chain untouched, and even large organised players need to deal with cash. There are many segments of the economy which operate only on cash. Whether demonetisation works or not, we have to attack this cash and the mindset. That much is certain.

wrote Akash Prakash

Categories
Links

Linkfest: November 18,2016

Some stuff I am reading today morning:

Half of 2016 IPOs are quoting below offer price (FirstChoice)

Banks cut FD rates (ET)

Consequences of the demonetization shock (Mint)

Currency Ban is tearing rural banks apart (Quint)

PayTM-The wonder wallet (Forbes)

Reforms and larger impact (Prashanth)

Best Monthly Income Plans from Banks (MyInvestmentIdeas)

Hop on Warren Buffett’s  “deathtrap” (DR)

How to save yourself trouble and money (Irrelevant Investor)

Demonetisation has shaken our trust (Devangshu Datta)

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Cartoon

Meanwhile, in Nigeria

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Categories
Observations

Kissa Kursi Ka

The Tata-Mistry brawl offers lots of interesting lessons about human behavior.

One old and time-tested lesson is that people respect the Kursi (Chair/Seat of Power) and not really the bloke sitting on it.

Cyrus Mistry has learnt this the hard way from vendors and sub-ordinates who till a month back were bowing and scraping to him.

Anil Nanda,Chairman & MD, of Rediffusion Y&R has written an open letter to Cyrus Mistry which is published on the front page of ET

He ends this very interesting letter with a stern rebuke to Cyrus :

“Please do not place selective facts about us to suit your narrative before the Media and Public.

Our reputation has been built over 43 years and I will not allow it to be tarnished in any manner whatsoever.”

Harish Bhat was a part of the Group Executive Council (GEC) which directly reported to Cyrus.

An 2015 anecdote makes for amusing reading now:

One recent afternoon, Harish Bhat, a member of the Tata Sons group executive council, a body of young leaders that provides strategic direction to the conglomerate, showed up at Phoenix, a mall in south Mumbai that is always teeming with shoppers. Bhat wasn’t there to shop but to watch people shop. He was curious about what consumers purchase and what they do before deciding to buy something. Bhat has been making frequent visits to Phoenix in recent days.

Bhat’s visits to the mall and his recent nosiness for consumer habits are all closely tied to the wave of changes sweeping across the Tata group, one of India’s largest business houses. The Tatas want to radically change the way they approach consumers. The group wants to get closer to the consumer — become a little more humble, if you will, in the process. It not only wants to understand consumer behaviour but also address their grievances.

The renewed attempts at sharpening the consumer focus have come under the direction of Tata group chairman Cyrus Mistry and Bhat is in charge of the task. “Consumer trends are top of his (Mistry’s) mind today,” says Bhat.

Harish Bhat managed to survive the firing of Cyrus Mistry and in a strange twist of events,moved a resolution to remove his former boss as the Chairman of Tata Global Beverages.

In his own words,Harish Bhat says:

“Let me start by saying that I have very high personal regard for Mr Cyrus Mistry and I continue to hold him in high personal regard. Having said that, the reason that I proposed this resolution was because I believe that having a chairman of the board who is in a position of hostility to the major promoter company which is Tata Sons, which the major promoter company of Tata Global Beverages, is really to the detriment of all stakeholders of the company including the minority shareholders of the company”

Harish Bhat seems to have taken the advice of Prof.Nirmalya Kumar (his colleague on the GEC team who was fired) to heart:

When in future anyone mentions me, please don’t say anything positive. Throw me under the bus to gain credibility in the new regime.

Categories
CoatTailing

Portfolio of Sundar Iyer

This post is in continuation of my coat tailing series (see here)

To know what other top investors are  buying/holding/selling in India, subscribe to our Investor Wisdom Newsletter

Sundar Iyer is a very well known broker/investor from Mumbai.

His significant holdings in his personal name of more than 1% as on 30 September,2016 as per Stock Exchanges is given below:

Company Name Symbol Entity Name Date End # of Shares % Value (In Crores)
Force Motors Ltd 500033 Vanaja Sundar Iyer 201609 200000 1.52 80
Jamna Auto Industries Limited JAMNAAUTO VANAJA SUNDAR IYER 201609 2000000 2.51 36.63
Man Infraconstruction Limited MANINFRA Vanaja Sundar Iyer 201609 2600000 1.05 10.18
Multi Commodity Exchange of India Limited MCX Vanaja Sundar Iyer 201609 525000 1.03 67.82
N2N Technologies Ltd 512279 Sundar Iyer 201609 52600 1.69 0.21
Nilkamal Limited NILKAMAL Sundar Iyer 201609 200000 1.34 25.89