Clampdown on notes augurs well for financial savings: Report

The government's ban on high-value notes is expected to come as a shot in the arm for financial savings in the long term as households may cut down allocation for physical assets such as gold and property, says a Morgan Stanley report.
According to the global financial services major, this could affect economic activity in the near term, but will be more than offset by the positive impact resulting from improved transparency and tax compliance in the medium term.
"... Households have traditionally parked their savings in physical assets such as gold and property. This move would also have an impact on their allocation decisions and have the impact on improving financial savings within the economy," Morgan Stanley said in a research note.

From a funds flow perspective, household physical savings stand at around USD 270 billion (13 per cent of GDP) while financial savings are USD 160 billion (7.7 per cent).
In a crackdown on black money, fake currency, corruption and terror financing, Prime Minister Narendra Modi last night announced demonetisation of Rs 1,000 and Rs 500 notes with effect from today.
"We believe this is a continuation of the government's reform agenda, with a focus on improving the business environment," the report said.

By curbing black money, it will help improve tax compliance in the medium term, which is much needed given the very low number of tax payers currently approximately at just 1 per cent of the total population.

"We believe this move will help reduce black money more systematically, and in the long term improve the ease of doing business in India," it added.
The government's precision strike could hurt economic activity in the near term, particularly the rural economy, where a large proportion of transactions are still conducted using cash, and spending on big-ticket items such as white goods, automobiles and property.
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Ambit Capital said this will help lower the cost of debt capital in India in the long term by forcing the white money supply to increase. But, in the short term, this is likely to cause economic activity to freeze with India's black economy estimated to be around 20 per cent of the size of India's GDP (or USD 409 billion), it added.

Demand for real estate and big-ticket consumption is likely to be hit most profoundly, it said.
According to Bank of America Merrill Lynch, the move will result in higher liquidity and lower rates.
"This should lead to lower yields as well as lower rates," BofA-ML said in a research note adding that it has grown "more confident" on its call of a 75 bps cut in bank lending rates by September 2017.
BofA-ML said it expects the RBI to go slow on Open market operations (OMO) till there is clarity on how much money will flow into bank deposits by December 30.