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Monetising India

17 November 2017

After years of high inflation and chequered growth, recent reforms could help address two fundamental weaknesses in India’s economy.

If stock markets tell you anything about the impact of political leaders, then in his time as prime minister, Narendra Modi has performed better than most.

Since he became prime minister on 26 May 2014, India’s two leading stock market indices, the Sensex and NIFTY 50, have each risen by more than 30%.1 While stock prices reflect politics less often than newspaper headlines imply, and other macroeconomic factors have also been at play, there is little doubt that Modi’s policy plan has buoyed investor sentiment.

“We’ve been invested in India for more than 15 years and have an understanding of the market – it’s our contention that India is in the best position it’s been in for 15 years,” says Ajay Krishnan of Wasatch Advisors. “The big [financial] challenges India has faced in the past have been high inflation, a weak currency and a poor current account deficit. All those things have now changed.”

A falling oil price has cut costs for a country that imports $120 billion of oil annually – around 6% of GDP. Inflation, meanwhile, has slid from more than 9% in 2013 to under 5% today, helped by a relatively benign monsoon season.2 The country’s foreign exchange reserves have risen by a third over the same period to a very healthy level.3 If weather and oil have helped matters, Krishnan has little doubt which factor has been most decisive in improving the outlook for investors.

“It’s the change in the political climate,” says Krishnan. “If you look at India, there are two intractable problems that the country has faced for a long period of time – one is poverty and the other is corruption. This is the first government since the 1970s that has shown a willingness to tackle these problems head on.”

23 billion notes

The government is certainly not shy in its methods. At 8pm on 8 November last year, the prime minister used a television address to communicate that the government was discarding all 500 and 1000 rupee notes – 86% of the currency in circulation, or 23 billion notes – from midnight that day. There followed a frenzied nationwide attempt to cash in holdings. Newspapers carried reports of a whole range of personal financial disasters that resulted, not least among poorer citizens.4

The target, however, was corruption. By eliminating the larger denominations, the government hoped to kneecap both the black market and criminal groups. It also rolled out Aadhaar, a new biometric ID card system which the UN praised as a “critical step” in offering fairer access to government services – the Bill & Melinda Gates Foundation also voiced its support for the innovation.5 The system had more than 1.17 billion registered members as of 15 August 2017.6

“I think it was a masterstroke – it took a lot of courage,” says Krishnan. “The current government is taking a really long view. Modi’s willing to risk short-term perturbations for the greater good in the long term – something that governments haven’t been willing to do in the past.”

One effect of the move has been to pump a lot of extra liquidity into the banking system. Subhash Mundra, deputy governor of the Reserve Bank of India, argues that is just one of the benefits of the scheme – the other two are increased digitisation and improved tax compliance.7 The increase in liquidity has had a range of significant benefits, according to Krishnan.

“The interest rate decreases you’ve seen are basically a function of the liquidity-drive event – although the government is helping, it’s primarily driven by the banks themselves, who are arguing that they have so much money now that they have to lend,” says Krishnan. “That creates a virtuous cycle because the borrowing rates have come down, and so companies and individuals can invest and buy goods and services, which is good for the economy.”


Wasatch Advisors is a fund manager for St. James’s Place.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. 

The opinions expressed are those of Ajay Krishnan of Wasatch Advisors and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or adopt a strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.

1 Source: Bloomberg
4 See, for example:

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