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Demonetization Effect on Share Market

It is been more than a month now that the Modi government has announced the demonetization of the high-value banknotes of Rs. 500 and Rs. 1000. The move has polarized the entire country between those who are in support of the idea and those who are not. This move has also shown its impact on the Indian stock markets. A number of investors have started to withdraw their capital from the share markets; while some did it due to lack of funds, there are others who are expecting a further fall and hence are looking for an opportunity to buy shares at a lower level.

While a number of financial experts have welcomed the move by Mr. Modi and called it bold, they expect the share markets to get hurt for at least 6 months to a year. Though the markets would see a comeback, traders, and investors who are presently investing need to play smart and take a wise and informed decision to achieve success in their trades.

Let us now have a look at the demonetization impact on the Indian share market.

Even after the announcement of demonetization, the pharma stocks have seen a huge increase in their price. While some expected that the election of Donald Trump as the President of US will cause hurdles in this sector, but the analysts had a different opinion. As the chemists accepted the old currency of Rs. 500 and Rs. 1000 till the 15th of December, many did purchase the medicines for 6 months to a year. With this, the pharmaceutical companies might present decent Q3 results.

Some of the stocks from the Housing finance sector that are a hot favourite for many fund managers are the LIC Housing, Gruh Finance, and Can Fin Homes. While many fear that these stocks might get affected due to the fall in prices of realty sector, there are others who state that the fall in property prices is the best thing that can ever happen to housing finance companies. These companies flourish when the property prices come in the reach of the salaried people and the first time property buyers.

The banking sector is the one that can expect a benefit as money would flow into all the banks irrespective of it being a Private Sector bank or a public sector bank. More funds were seen flowing into the public sector banks, thanks to the thousands of Jan dhan accounts that were opened. But experts also feel that once the dust settles, the private sector banks too will start enjoying good benefits like before. Hence, this is one sector that gets a sure benefit due to demonetization. Even if there are stocks that have seen a downfall, experts say that a major pullback can be expected once the cash rotation gets normal.

The move of demonetization has affected the purchasing power and this decrease in the purchasing power will start to show its impact on various services and goods. This can be felt for those assets that are used as long term investment like real estate, vehicles, and core sectors of cement and steel and so on. The stock prices of the companies from these sectors will have a negative impact and the impact of demonetization on companies from Pharma, IT and FMCG will be limited. If you are a trader planning to make some good money in equity, the infra stocks are at a low and experts consider these to be a good buy.

Demonetization Effects on Debt, Loans, and Investments

The mutual funds are expected to get benefited from demonetization in the long term. With the banks to reduce the fixed deposit rates soon, more people would shift their investments towards mutual funds to earn more returns from inflation. As good equity mutual fund investment companies invest in strong stocks, one can expect to receive good results with a low price investment.

Investors can also invest their funds in saving schemes like NSC and PPF as they would give higher returns when compared to the fixed deposits of banks. One can also consider investing in tax-free bonds as they give 6% returns and do not have a lock in period. The interest one earns on tax-free bonds is not taxed whereas the interest that is earned on fixed deposits is taxed. Apart from the reduction in the interest rates on bank fixed deposits, one can also expect a reduction in the lending rates which would mean lower EMIs on your home and car loans.  

Though the government has taken the move of demonetization to curb black money, it is an individual’s duty to know its impact on their investments and loans. Well, all we can say is, invest safe, take wise decisions and get rich.


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