NEW DELHI: The Modi government's demonetisation drive may have received a lot of flak and slowed down the economy temporarily.
But it also did something very positive: it increased velocity of money which can in turn boost economic growth, going ahead.
Experts say while the positive impact of the cash ban is yet to show on the economy, the government efforts to bring money out of lockers to banks and from banks to borrowers will have a multiplier effect on the economy.
"When money is in tijori, the impact on the market and on the economy in terms of credit flow is between one to two times. The same money when deposited in a bank, allowing bankers to go out and lend and consumers to come out to borrow, it creates velocity of about seven times," said Market veteran Nilesh Shah.
In an interview to ETNow, Shah said the government would not be printing as much cash as was there in the economy before November 8 (the day demonetisation drive was announced), but it will be able to shift roughly about 3 per cent of GDP from cash in tijori to cash in bank accounts.
"That can create an option for the banking system to create a multiplier effect of almost 15 per cent of GDP over the next 24 to 36 months. Obviously, it looks easy on excel sheet and it is difficult to execute on the ground, but steps are being taken by the government to put that mechanism in place," Shah pointed out.
Data showed non-food gross bank credit growth dropped 3.3 per cent YoY in February from 3.5 per cent YoY in January, thanks to poor corporate credit demand, risk aversion and continued disintermediation from corporate bonds.
Marketmen believe given the pace of currency withdrawals from banks in the last eight to ten weeks, there could be a permanent surplus interbank liquidity of ₹ 2-3 trillion.
So far, 67 per cent of the demonetised money has been withdrawn by the public to fund transaction demand and, going ahead, banks are estimated to retain ₹ 2,00,000 crore of demonetisation deposits, BofA-ML noted.
Rajeev Thakkar, CIO at PPFAS Mutual Fund, said investors are not looking at this quarter's earnings. Instead, they are seeing India as the next developed country on the horizon and expect so much of GDP growth and so much of wealth creation that one can just hang on to the seat and need not worry about quarterly earnings.
"Do not worry about small ups and downs or temporary over-valuations. This is what people have bought into. How long it continues remains to be seen," Thakkar said.
Shah said there has been a serious attempt by the government to check bad loans in banks and many senior-level appointments such as EDs and MDs have been cleared in the PSU bank space.
"There are 3.76 crore Indians who have EPFO accounts. They have been allowed to withdraw 90 per cent of corpus for house buying purchases. They have been allowed to withdraw 75 per cent of the corpus for purchase of vehicles. Consumers are getting excited about lower interest rates and about using their own retirement corpus. On the affordable housing side, lots of steps are being taken to create supplies," Shah said.
So how do equity investors cash in on this?
Dharmesh Kant of Motilal Oswal Securities told ETMarkets.com that the thing to watch out is withdrawals after the lifting of cash limits and, most importantly, the improvement in credit demand for.
"If sizable money is kept parked, it will improve banks' casa and lower their cost of borrowings. But there needs to be credit demand as well for that multiplier effect to take place," Kant said.
Angel Broking in a note said following the demonetisation drive, remonetisation is now looking for earnings recovery and as discretionary demand returns, with money supply getting normalised, it is a matter of time before consumption activity picks up, the brokerage said.
"On industrial capex, broad expectation is that the cyclical recovery should start emanating at the end of this financial year and this shall create a base for a strong case of earnings recovery in the second half. Implementation of GST in the second quarter of this fiscal shall have profound implications in the way the business gets conducted especially by the organised players and listed players in particular and we are bound to see a paradigm shift in consumption patterns getting shifted to organised players as the price difference over the next few months might not exist throwing out a lot of the unorganised players. So domestic consumption along with cyclical is something to bet on over the next 15-18 months," the brokerage said.
The original article could be seen here.