It has been a year since Prime Minister Modi in his Mitron speech unleashed demonetisation upon us - killing 86% of the legal currency in circulation with one speech of his on November 8 2016.
While the nation still debates why the policy was even mooted, it appears that other investment sectors such as Gold and Mutual Funds have emerged as the biggest benefactors, at least according to a study.
Though demonetisation's stated aim was to eradicate black money, it ironically resulted in an uptick on Gold, Mutual Funds, and even equities, the experts behind the report have concluded.
Nilesh Shetty, Associate Fund manager with Quantum AMC, recalls, "Corporate India was sitting on freshly expanded capacities and having faced two years of weak demand in FY15 & FY16, due to failure of monsoons and stagnating policy making under UPA 2, was finally staring at a pick-up in consumer sentiment."
"The feedback from consumer companies on demand in the festive season just prior to the demonetisation exercise suggested we were on the cusp of an economic recovery driven by better monsoons and stimulus in the form of pay commission hikes and one rank one pension payouts."
Then demonetisation struck. The reform was a "kick in the gut to the Indian consumption cycle" that deferred economic recovery by up to 18 months, explains Shetty.
"Inventory cycles which were disrupted after demonetisation have again been disrupted due to GST and have still not normalised. After one year of the exercise it looks like Raghuran Rajan's original hypothesis to the government of the costs far outweighing the benefits may have been proved correct," he adds.
If one thought that demonetisation would drive out black money and reduce gold consumption, then it clearly didn't.
"There was a view that demonestisation would significantly reduce gold purchases but that hasn’t happened. Rather we are seeing significantly higher demand this year as compared to the year before demonetisation. India imported about 640 tonnes in the first three quarters of this calendar year as compared to 510 tonnes in whole of 2016. Clearly, demonetisation has clearly failed in many of its agendas including its impact on gold," says Chirag Mehta, who looks after alternative investments at Quantum AMC.
The minute November 8 struck, a mad-dash for cash at the ATM to buy consummables was evident. Gold was a safe haven, easily liquefiable, since cash was hard to come by. Rumours suggested that many gold dealers were accepting old notes for gold well past midnight, thereby providing an easy route to exchange the notes.
Gold prices shot up to a three year high of Rs 31750 per 10 grams on November 10. The government clampdown had resulted in a sudden demand for Gold
"Significant amount of gold was sold to purchasers scrambling to convert their currencies at hand into gold. The gold rush was so strong that many jewelers sold whatever they had on their showcases and were left almost empty," adds Mehta.
"As remonetisation gathered pace, gold buying gained momentum largely as a inventory build-up at the wholesalers and jewellers end," adds Mehta.
Assets under management of Mutual Funds rise too
Quantum's data suggests demonetisation has not impacted stock market investments too - particularly in the mutual fund industry.
"Overall AuM (assets under management) grew by 25% since November 2016, which was almost same for prior eleven months (1 Dec 2015 – 31 Oct 2016). Equity AuM grew by 36% during the same period versus growth of 19% from Dec 2015 to Oct 2016," shares Harshad Chetanwala, another analyst from Quantum.
The AuM growth is attributed to increase in general market levels (both the BSE and NSE benchmarks have hit record highs this month) as well as new inflows from investors.
The graphs suggest users switching from conventional bank accounts to Mutual Funds.
"This is natural because with lower interest rates these days, keeping money sitting in a bank account would not earn very high returns," Harshad noted.