Stocks Trim Losses From Modi’s Banknote Jolt as Rupee Recovers

  • Property developers worst performers among industry groups
  • Sovereign bonds rally as decision seen boosting cash at banks

Indian equities pared losses and the rupee reversed declines as investors reassessed the effects of Prime Minister Narendra Modi’s shock measures to curb corruption and Donald Trump’s surprise victory in the U.S. presidential election.

The S&P BSE Sensex fell 1.2 percent at the close in Mumbai, after tumbling as much as 6.1 percent earlier. The rupee climbed 0.3 percent to 66.4350 per dollar, recovering from a 0.5 percent drop. A gauge of property shares sank as much as 17 percent after the government unexpectedly withdrew high-denomination banknotes in a clampdown on black money.

IndexChangeSize and Scope
S&P BSE Sensex-1.2%Four-month low
NSE Nifty 50-1.3%Four-month low
BSE Realty Index-10%Most in 14 months
BSE MidCap Index-1.9%Three-month low

“One should look beyond the short-term impact,” said Navneet Munot, who oversees the equivalent of $18 billion as chief investment officer at SBI Funds Management Pvt. in Mumbai. “When there is indiscriminate selling, several stocks fall more than what the fundamentals warrant. We will look for those opportunities.”

A selloff in global markets eased after a knee-jerk selloff in stocks and rally in haven assets amid speculation Trump as president would increase spending to spur economic growth. The yen, gold and government bonds scaled back gains. Mexico’s peso led emerging-market currencies lower amid concern U.S. trade policies will become more protectionist. The rupee’s one-month implied volatility surged 39 basis points.

Five hundred rupee ($7.5) and 1,000 rupee notes will cease to be legal tender from Wednesday, Modi said in an unscheduled address late Tuesday evening. The notes in circulation will have to be deposited in banks by the end of December, he said, leading to a rally in sovereign bonds Wednesday on expectations of improved financial-system liquidity.

‘Collateral Damage’

Chaos prevailed across major Indian cities as people lined up outside currency dispensing machines following the announcement. With bullion usually bought in cash in the nation, the announcement led to a frenzy among people wanting to convert their cash hoard into gold.

Some domestic institutional investors used the declines to buy stocks, said Deven Choksey, managing director of Mumbai-based K.R. Choksey Shares & Securities Pvt.

“We told our clients this morning to buy as our markets are suffering from collateral damage, not weak fundamentals,” he said. “All institutional investors, even those who manage money for wealthy individuals, are buying.”

Mutual funds and insurance companies have bought a net $663 million of shares this month, extending October’s purchases of $1.2 billion, data compiled by Bloomberg show. Foreigners, in comparison, have bought $55 million, after pulling $746 million in October that was the first selloff in eight months.

Bond Rally

The yield on government notes due September 2026 plunged 13 basis points to 6.67 percent, according to the Reserve Bank of India’s trading system.

The decision to pull high-denomination notes will boost banking system liquidity, according to Vivek Rajpal, an interest-rates strategist at Nomura Holdings Inc. in Singapore.

“As black money is reduced, tax collections should improve significantly, and that would be very positive for India’s fiscal situation,” said Ananth Narayan, Mumbai-based regional head of ASEAN & South Asia financial markets at Standard Chartered Plc. “This is a major crackdown on corruption, and the parallel economy.”

— With assistance by Subhadip Sircar

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