RBI Answers Questions on Rs 500 and Rs 1000 Note Ban

November 08, 2016: the day began like any other day, but we knew the evening would bring in fireworks (for the folks in the US anyway) as this was the day Americans would choose either Hillary Clinton or Donald Trump as their 45^th President - the most powerful person on the planet. So, wanting to catch up on the US elections, most of us tuned into our television sets, only to get hit by news of a new surgical strike (this one against black money) announced by the Prime Minister of India.

The combination of these two factors made the S&P BSE SENSEX crash by more than 1,600 points in the opening session on November 09, 2016. The markets eventually absorbed the shock and trimmed losses at the end of the day, closing ~338 points lower.

First, the Modi Masterstroke

"In every nation's destiny comes a time when the actions taken have a defining impact on its destiny. We are at one such moment today," Prime Minister Narendra Modi said in a televised address to the nation, as he announced that 500 and 1000 Rupee notes would no longer be valid from midnight of November 08, 2016. The announcement hit the country like a massive thunderbolt. For the salaried class, it was a reason to celebrate, and for the people hoarding black money, a lot less so. All of us, at Quantum, are elated with this announcement. The newspaper Mint has rightly said "The Modi government move to withdraw currency notes of Rs.500 and Rs.1,000 denominations, hits a fundamental reset in the Indian economy"

The measures taken by the government and how they affect us as individuals have been perfectly summarized in an FAQ format by The Economic Times. 

The reason for banning Rs.500 and Rs.1,000 notes is clear - the government is committed to curbing and eventually eliminating black money. The warning bells were rung by the Prime Minister way back in June 2016, when he asked everyone to declare black money in the amnesty scheme, warning that tough measures were to follow; and follow they did. Most of us know that there are certain businesses which are conducted on the basis of cash transactions only, where the owners sit on piles of money which does not enter the mainstream economy. That money is now practically worthless, as it has to be deposited in the bank, and deposits over a certain amount may come under the scanner of the IT department.

The government should be lauded for the speed and execution of the move, but what remains to be seen is how it affects the ground reality.

Speaking of ground realities, on the other side of the world, Mr. Donald Trump's feet must be barely touching the ground as he looks set to enter the White House as the President of the United States.

The Trump Triumph

What was predicted initially as a mere formality for Hillary Clinton to walk into the White House, now seems like a pipe dream for her. In one of the most hotly-contested elections in the US history, it is Donald Trump and not Hillary Clinton who will sit in the Oval Office.

While the final results were still coming in at the time of writing this article, the projections show that Trump has 278 seats to Clinton's 218*. Trump has swung the key battleground states of Florida, Ohio and North Carolina while only Virginia has gone Clinton's way.

The markets were clearly hoping for a Clinton win, but with Donald coming up Trumps - here is how various markets and asset classes reacted:

*The Indian markets were also impacted by news of discontinuation of the 500 and 1,000 Rupee notes

So while it seems that the world has changed (and how!) in one evening, we recommend that you do not change your portfolio based on these events. The India growth story continues to remain on track and the latest move from the Prime Minister is again a great step in the right direction.

Do not panic and stay invested with a fund house that has an investment philosophy that resonates with your own.

Source: Economic Times, BBC News, Mint, Bloomberg

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Above article is authored by Quantum.

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