Booster Dose for Indian Finance

PM Modi’s move to demonetize high denomination currencies would pump bond, MF and small saving schemes while FDs and realty sector would face a severe hit on its business

By Dr Awanish Kumar Mishra

Prime Minister Narendra Modi’s surprise move on demonetization has changed the way personal finance space has been working for decades. The move will infuse accountability in a more recognized fashion in personal finance market, be it equity, mutual fund, bond or realty. With huge amounts pouring into banks, loans are set to get cheaper, while return on deposits would take a hit. Prices in real estate are likely to tumble and mutual funds may get desired boost. Let us discuss these in detail.


With hefty amount of cash coming into the banking system, banks have been empowered by a high amount of current account and savings account (CASA) deposits. Huge deposits into Jan Dhan accounts would solidify the base capital of banks and reduce dependence of banks on high cost borrowings. Therefore, they are likely to pass this benefit to their consumers willing to take loan. Banks would lure such consumers by reduced interest rates to increase their asset side. Soon lending rates are expected to go down. One can expect his/her equated monthly installments on various loans to go down sooner than later. New customers are likely to be benefited more with a number of extra benefits like discount on processing fee etc. as banks would compete to grab them. The murmur of deposits adding to liability of banks is illogical as dip in consumer demand won’t last long and credit off take will give a fillip to banks profit.


With banks collecting huge amount of money in savings accounts, they actually don’t need fixed deposits. They would not like to spend over 7 percent per year on fixed deposits, when they have already collected hefty amount of money in savings accounts which cost them mere 4 percent per year. Hence, banks are expected to curb deposit rates by 25 to 50 basis points in coming three to six months. In fact, banks have started cutting interest rates offered with their fixed deposits. Some banks have lowered bulk deposit rates by as much as 75 basis points.


Things would be better for senior citizens, who can invest money in senior citizen savings scheme (SCSS).  However, interest rates on SCSS also may come down, but one can always expect higher returns on these in comparison to bank fixed deposits. Other small savings schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) would certainly offer higher returns than bank fixed deposits.


There is not expected much of an impact on primary residential market, where properties are bought and sold through bank loans and mortgage. However, there is certainly an impact expected in deals which are done in cash. We expect a 15-20  percent correction in realty prices. Tier-2 and tier-3 cities, where cash component in realty deals are much higher may witness more impact. Also, unorganized builders will be most affected. As real estate prices are likely to fall, LTVs (loan to value) for loan against property (LAP) are expected to rise. This may make the product riskier than ever before.


Mutual funds have been seen as investment instruments which provide better returns in medium to long term. These are tax efficient too. Demonetization has led to increase of cash flow in the Indian banking system and this liquidity is also expected to flow into mutual funds. With demonetization of high-value currency notes, mutual fund industry is betting big on conversion of these cash assets into mutual fund investments. Mutual fund industry has grown at a rapid pace in 2016 with addition of almost Rs 4 lakh crore to its asset base and is looking to cross Rs 20-trillion mark in 2017. With banks offering less interest on fixed deposits, investors are likely to shift their money to mutual funds in quest of inflation beating returns. When interest rates expected to fall in the economy, debt mutual funds are also expected to do well.

It is well known to all that stocks with good fundamentals always fare well in the long term. Another thing is better equity mutual fund schemes invest in such fundamentally strong stocks. However, stock markets are falling due to uncertainty related to demonetization; it is offering a good opportunity to invest in good equity mutual funds at lower prices. These equity mutual funds would fetch better returns in the long run.


With huge money deposited in banks, the demand for government bonds and other high rated bonds is expected to increase. This would lead to reduced bond yields and that would lead to price increase for old bonds and hence profit for long term bond funds as well as tax free bonds. Investors should consider tax free bonds for investment as well. If one falls in the higher tax bracket, this is an excellent investment for him/her.


Demonetization move of the government has given a fillip to insurance sector. As per data released by the Insurance Regulatory and Development Authority of India (Irda), individual single-premiums collected in November-for all the life insurers-was Rs 6,692 crore, which is 507 percent more than the Rs 1,103 crore collected in November 2015. On a month-on-month basis, the segment grew 170 percent from Rs 2,481 crore in October 2016. In November, Life Insurance Corporation of India (LIC) collected Rs 6,438 crore as premium for individual single-premium plans, compared to Rs 899 crore in November last year- registering a growth of over seven times. To encourage cashless transactions, LIC announced a cash back policy if people use cashless methods to pay their premiums. Equities to see boost in long term


Indian stock market has been affected by demonetization for sure. In short term, market might be facing rough weather because of uncertainties arising out of demonetization and resultant short term slowdown in economy. But in the long term, corporate earnings are expected to do well. Economy would also pick up due to cheaper loans, much awaited tax breaks and pick up in consumer demand taking equity market to a new high. Retail participation in Indian stock market is expected to increase through equity mutual funds.  EPFO money and Pension fund corpus may help equity market to stabilize and thrive on domestic money.

In totality, demonetization drive by the government is a win-win situation for all the regulated and formal sectors of personal finance space. Yes, the money lenders, havala operators, dabba traders, fly by night chit fund operators may be getting one more nail in their coffin. The demise of all such unscrupulous agents of black money market would be helping formal investment vehicles to scale a new high in popularity and inflows.

         Loans set to get cheaper

         FD to lose their shine

         Small saving schemes to continue shine

         Real estate prices may tumble

         Mutual funds may expect better inflows

         Tax free bonds may get more demand

         Insurance sector to get more attention

         Equity market may scale up in medium to long term