Mumbai, May 26, 2010 (FBC) India’s “small demonstration” of issuing 2000-rupee notes has no monetary policy implications but may be politically motivated, said Chris Wood of Jefferies.
“It’s officially rationalizing the anti-corruption angle,” Wood said in his GREED & Fear weekly.
“However, there is a political motivation in the funding of opposition parties by the ruling Bharatiya Janata Party government. Elections in India are financed by money-laden goads,” he wrote.
India will hold a series of state elections this year and a general election in 2024.
Analysts said that the introduction of Rs 2,000 notes is unlikely to destabilize the economy. Unlike the 2016 demonetisation, local banks have not seen a rush to deposit notes, but consumers have opted to spend on luxury watches at Mango.
Wood remains the “builder” in India.
“The clearest positive point from a stock market perspective is that inflation has ended as the monetary tightening cycle has eased in recent months,” he wrote.
India’s core inflation eased to 4.7% in April and was seen close to 4% in May.
Wood sees inflation averaging 5% this fiscal year and expects policy rates to drop this year or next.
As the monetary policy cycle tightens, there is no clear near-term trigger to save external risk market action for further valuation correction, he wrote.
Indian stock markets, at a one-year forward price-to-earnings ratio of 18x, are marginally higher than the 10-year average of 17.4x, according to the note.
“Buyers of Indian stocks have come back of late as foreigners have retreated from China again,” Wood said.
After selling $4.5 billion worth of Indian stocks in the three months to February, foreigners have bought $7 billion worth of stocks since March.
Reporting by Ira Dougal; Editing by Sohini Goswami
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