Sensex Stays Flat; IT Stocks Witness Selling Pressure

Fri, 6 Jan 01:30 pm

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After opening the day on a flat note, the Indian share markets have continued to trade flat, and are trading just below the dotted line. Sectoral indices are trading on a mixed note with stocks in the IT sector and FMCG sector trading in the red. Stocks in the banking sector are witnessing maximum buying interest.

The BSE Sensex is trading down by 28 points (down 0.1%) and the NSE Nifty is trading down 7 points (down 0.1%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading flat. The rupee is trading at 67.93 to the US$.

The demonetisation drive may have ended on 30 December 2016, but there is no doubt that it has had its effect on the way Indians spend their money.

According to a leading financial daily, the purchasing sentiment of Indians during December fell steeply by 0.42 points with the Buying Propensity Index (BPI) standing at 0.26 points, a nine-month low. The BPI in November 2016 had stood at 0.68 points.

The BPI, measured on a scale between -1 to +1 is a quarterly index that measures the buying keenness among consumers. With a higher number signifying higher propensity to buy, and a lower number signifying the opposite.

The steep decline in the BPI can be attributed to a single major event that occurred in November - demonetisation. Majority of consumers facing a cash crunch were expectedly not keen to splurge on any purchases other than essentials.

The December fall was when the pain of demonetization began to be felt more severely after the first salary cycle post-demonetisation announcement in December, and the impact of the enduring business and personal hardships was felt by citizens.

The Index, based on research across 3,000 consumers- influencers across the eight tier I cities, found that Delhi was most severely impacted with a month-on-month fall of 122 per cent in citizen keenness to buy, registering a negative sentiment in December at -0.14, followed by Kolkata with a BPI fall of 90 per cent.

Demonetisation hits consumer purchases

As evident from the chart, consumer sentiment was consistently recovering since July, however the demonetisation announcement put an abrupt halt to the recovery. It remains to be seen how consumer buying will be affected in the near term as the impact of demonetisation still lingers.

In other news, according to a State Bank of India (SBI) report, the supply of cash will be restored to near normal levels by the end of February 2017 given the current trends in supply of currency notes.

According to Reserve Bank of India (RBI) data, only 44% of the demonetised currency has been replaced by the end of December. This is much lower than the earlier estimates of around 53%. One possible reason for this could be that the RBI is also printing notes of small denominations apart from ?500 notes and hence, the total value getting replaced is lower than projections, though the number of pieces may not.

30 December was the last day on which the public could deposit old notes with banks following the 8 November demonetisation announcement. The level of replenishment is perhaps not rising faster because the central bank, having initially focused on pumping new Rs 2,000 notes into the system, is now concentrating on currency of lower denominations.

The report observes that if the RBI continues to print at the current rate then by January-end, only about 67% of the currency should get replaced vis-a-vis the earlier estimate of 75%. However, the report estimates the RBI to print as much as 80-89% of the total currency at the current rate.

On the other end of the spectrum, an estimated 97% of the old Rs 500 and 1000 notes have been deposited in banks by the end of 30 December. This development lends even more pressure to the cash shortage as the currency in circulation is not enough to meet the demands of the economy.

The current numbers cast a serious doubt of the success of the demonetisation drive in meeting its much touted goal of eradicating black money. With most of the currency back in the banking system, it is unclear how black money will be done with. Considering all of this, my colleague Ankit Shah raises a pertinent question: Was this really a fight against black money?

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