Don’t be put off by India’s cash cull

Do investors need to worry about India’s cash crackdown? Darius McDermott, managing director of Chelsea Financial Services, does not think so.

Don’t be put off by India’s cash cull

Indian Prime Minister Narendra Modi took out 86% of all cash in circulation when he announced 500 and 1,000 rupee bills would no longer be legal tender earlier this month1. Although most people agree with the long-term goal (to stymie corruption and black market trade), investors have worried about short-term economic impacts. They shouldn’t.

The move saw an immediate drop in sales across consumer industries and Indian equities are down roughly 8% in sterling. To my mind, however, in a market that is notoriously expensive and whose demographic advantages remain undeniably strong, this may be a buying opportunity.


Let’s not forget, the stock market fall has also coincided with Trump’s US victory, which has caused a sell-off across emerging markets generally. In this context, India may actually be better placed than many other developing countries, as its trade ties with the US are not as significant as others and its domestic demand is phenomenal.

Removing a heap of cash from the economy may curb this demand temporarily, but it may also speed up India’s adoption of new payments technologies. This could be excellent news for a budding fin tech industry. Banks and financial firms may also benefit from the cash cull, as many predict an influx of savings into official institutions after years of hoarding shoe boxes under the bed.

There will be an adjustment period. Sectors like retail and food and beverage will obviously be affected by a lack of cash availability. Given the widespread use of cash, other industries may also struggle – for example, many smaller, rural farmers buy their seeds in cash; clothing manufacturers may still pay cash for textiles; construction sites may pay workers that don’t have bank accounts in cash and the list goes on.

But the long-term benefit to government tax revenues of, hopefully, significantly reducing India’s black money market should be immense. What’s more, if Indians do move away from a cash economy the amount of income declared for tax purposes should start to rise as more payments are tracked electronically.


Meanwhile, the conditions that had many fund managers so excited about India a few months ago still stand. It has been a good monsoon season, with decent rains to boost agricultural production. The passing of the goods and services tax (GST) bill will see a uniform tax applied across all states for the first time in India’s history. And the key interest rate was cut to its lowest rate in several years in October, which could give the economy a further boost – especially if another cut ensues.

My two favourite funds are Ashburton India Equity Opportunities and Goldman Sachs India Equity Portfolio. The Ashburton fund is extremely focused, holding just 20 to 30 companies that the managers believe have the strongest growth prospects. This often takes them outside the large, well-known names and into smaller stocks, which they research extensively, prioritising companies that have a history of treating their shareholders well. The fund has an overweight to financial firms.

The Goldman Sachs fund has a broader portfolio of around 80 to 90 stocks. It holds a range of mega, large, medium and smaller companies, which means it has the potential to capture growth at all levels of the Indian economy. Managers are based on-the-ground in India and conduct hundreds of meetings with companies each year, meaning they really have their finger on the pulse. The fund’s been around since 2008 and has beaten the India stock market by more than 50% over that period.


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

1Citi Research, Nov 2016 figures (quoted in commentary from Jupiter India Fund, 22/11/2016)


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