Modi banknote move jolts India stocks, as US vote weighs

Bloomberg

Indian equities and the rupee weakened after Prime Minister Narendra Modi’s government unexpectedly withdrew high-denomination banknotes and as Donald Trump clinched the US presidency.
The S&P BSE Sensex tumbled as much as 6.1 percent before trading 2.8 percent lower at 12:50 p.m. in Mumbai. The rupee dropped 0.2 percent to 66.7425 per dollar, poised for its biggest drop since Oct. 20. A gauge of real-estate shares sank as much as 17 percent amid India’s biggest crackdown against corruption in almost four decades. Index Change Size and Scope S&P BSE Sensex -2.8% Most in 9 months NSE Nifty 50 -3.8% Most in 9 months BSE Realty Index -13.5% Most since Jan 2009 BSE MidCap Index -4.2% Most in 14 months India VIX +12% Eight-month high
“It’s a double-whammy for the stock market — the action against black money and Donald Trump’s surprise win,” said Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance Co., which has about $6.5 billion in assets. “Real-estate companies, construction and jewelry sectors are driven by cash transactions. They will find it very difficult.” A selloff in global markets also weighed on Indian equities as investors rushed to adjust for Trump’s victory. Futures on the S&P 500 plunged 5 percent, triggering trading limits, while an index of developing-nation equities retreated to a three-month low. Mexico’s peso, which has weakened as Trump’s prospects improved, sank by the most in two decades on concern a Trump win would lead to more protectionist U.S. trade policies.
The rupee’s one-month implied volatility, a gauge of expected swings used to price options, surged 72 basis points to 5.20 percent, data compiled by Bloomberg show.
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.
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 withdraw high-denomination notes will enhance 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.”