“Brace for Economic Disruption” SocGen Sees “Sharp Rise in Gold” as India Plans Cap on Cash Holdings
India’s demonetization scheme (the banning of high-denomination banknotes) has caused chaos across the nation, and while the government’s plan may have some short-term success in curbing ‘black money,’ investors should brace for economic disruption as the Indian government considers a cap on cash holdings for individuals. People will now be more inclined to put their black income in gold rather than in currency.
Durden discusses India’s fight against black money; loopholes that have provided an escape hatch; black money represents only a small fraction of black wealth; demonetization is not enough to fight the black money menace; and the positive and negative impacts.
GDP growth: The short-term demand destruction could be partly offset by continued government capex. There is a limited view of the demand destruction that may take place. There are potential downside risks to the existing growth forecast and the longer the disruption lasts, the greater the impact it will have.
Inflation: In the short term, there are potential downside risks to the inflation forecast given the demand destruction.
Monetary policy: With inflation likely to ease, there is a possibility of a bank rate cut at the December 2016 meeting. The monetary policy transmission pace is likely to improve, but this may not translate into higher credit growth. Credit growth is weak, and credit remains a demand, not a supply, issue.
Fiscal deficit: The government will be able to meet its fiscal deficit target for the year without compromising on its expenditure.
Current account deficit: The monetization scheme could lead to a higher deficit in the longer term as many who generate black income could turn to gold rather than cash in anticipation of periodic repeats of the demonetization scheme.
For now, the rupee is in freefall.