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Indian equities should gain over the next year or two as the government’s demonetization program starts to contribute to growth and the central bank looks at cutting rates.

Indian stocks tumbled in early November after Prime Minister Narendra Modi made a surprise announcement that 500 and 1,000 rupee banknotes (about 86% of note value in circulation) would no longer be legal tender, and that people had 50 days to exchange them for other notes at a bank or post office.

The crackdown on counterfeiting and India’s black market economy will mean some short-term pain as it disrupts businesses and consumers relying heavily on cash, with GDP expected to slow before picking up by the middle of next year. Birla Sun Life Asset Management Company estimates that over US$115 billion (8 trillion rupees) of deposits has already been returned to the banking system through the program.

Read: India’s latest currency reform causing choas, say analysts

Atul Penkar, head of offshore equities for Birla, sub-advisor for the Excel India Fund, says the program will result in a huge tax windfall for the government, which it can use to invest in education and infrastructure. He says it’s a good time to invest in the country on a three-to-five year horizon.

“That’s a huge portion of the economy which is not being accessed by the government of India,” Penkar says. “We will now have this 23% of GDP folding into the mainstream economy.”

Read: Were they right? Contrary call for emerging markets pans out

The government’s new GST bill will be a tailwind for Indian equities, Birla says in a recent research note, and demonetization has increased the odds of lower interest rates. The firm forecasts the Indian central bank to cut benchmark rates by 50 to 100 basis points over the next 12 months.

“From a medium-to-long term perspective, it makes a lot of sense to look at the current weakness in the market as a buying opportunity,” Penkar says.

The iShares MSCI India ETF fell below US$26 in November, down from a 52-week high of US$30.64 on the NYSE. It has since risen slightly to almost US$27.

Also read:

India closer to getting national sales tax

by Simon Doyle, an Ottawa based financial journalist.

Originally published on Advisor.ca
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