Beyond the next 3-7 days of logistical nightmare to replenish cash supply, demonetisation of 86% of currency in circulation will have significant short-term shock on most sectors.
Demand curve is expected to remain weak medium term. Private investment should weaken further; a deflationary environment will require more monetary and fiscal intervention. Over the next 1-3 months, we think all sectors barring IT & Pharma will face growth challenges, and in particular hurt discretionary spends, gold and real estate purchases.
We think banks will benefit from higher savings account accretion. While the black economy will certainly shrink, the second derivative impact of the wealth destruction on the real economy will still be meaningful.
Financial sector could face higher stress levels in the small and mid-corporate segment which is currently challenged by an extended working capital cycle. Collections on mortgages/LAP will face scrutiny. Car/2W, CV and rural demand would continue to be weak.
A slow growth environment coupled with higher banking system liquidity would possibly open up more rate-cut opportunities and treasury yields could fall further. However, we don’t think this will be sufficient to change the risk aversion. Even where cash is accounted for, we expect risk-aversion will remain high for conspicuous consumption items e.g. expensive watches, jewellery, upper end of alcoholic beverages, higher end cars, etc.