Who Will Be The Winners Of India's War On Cash?

by: David Krejca


The Indian government’s decision to withdraw high-denomination banknotes from circulation will have profound implications on the world’s third largest economy.

The Indian financial sector will likely be in the spotlight, but other assets such as digital currencies can rank among the top beneficiaries of the reform as well.

In search of an ideal security for the new India’s financial order, investors should carefully consider all aspects of a particular security such as tradability and expected volatility.


Almost a month has passed since the Indian government announced that five hundred rupee (~7.3 USD) and one thousand rupee (~14.6 USD) notes will no longer be a legal tender. This announcement came as surprise and in a country like India, the world's third largest economy and the world's second most populous nation, it did not take a long-time to cause chaos. According to Bloomberg, the abolished notes accounted for more than 85% of the money supply. The holders of the notes can deposit them in banks until the end of December, after which they will no longer be accepted.

Even though the old notes will be partly replaced by new notes of 500-rupee and 2000-rupee denominations, the reform is part of a wider government policy that aims gradual transition to cashless economy. Based on Credit Suisse estimates, more than 90% of consumer purchases in India are currently still being made in cash. One of Narendra Modi's election promises was to reduce the size of the shadow economy, counter tax evasions and black money and digitization of the economy is just one way to do it.

Who will reap the profits?

There are multiple direct beneficiaries of the government`s decision, but identifying the winners is not an easy task. First, one big group of the beneficiaries will certainly be several Indian fintech start-ups such as Paytm, ItzCash, Razorpay and MobiKwik, which facilitate digital payments by the provision of various e-wallet solutions. Even though these companies are not publicly-traded, some of them are backed by companies such as Alibaba (NYSE:BABA) - Paytm - or American Express (NYSE:AXP) - MobiKwik.

Second, another group that welcomes the prime minister`s action are the world`s largest payment networks, namely Visa (NYSE:V), Mastercard (NYSE:MA) and Paypal (NASDAQ:PYPL). In October, Visa issued a report called Accelerating The Growth of Digital Payments in India: A Five-Year Outlook, in which it identifies the key obstacles and opportunities on the way to a cash-less society. Mastercard, on the other hand, partnered with the Indian government and the company`s CEO, Ajay Banga, has met with India`s PM on a number of occasions.

Third, perhaps the most prominent group of the financial reform are, unsurprisingly, local banks. According to the Bank of America Merrill Lynch, bank deposits can be increased by as much as 2% of GDP, which will boost lending, lift banks` earnings and as a result spur economic growth. The Indian banking system is fairly complex, but can be basically divided into five main categories - public-sector banks, private-banks, foreign banks, regional rural banks and cooperative banks. Unfortunately, not all banks are publicly-traded and if they are, there are usually listed on the Bombay Stock Exchange or the National Stock Exchange of India in Mumbai.

The only two banks which are investable using American depositary receipts are the ICICI Bank (NYSE:IBN) and the HDFC Bank (NYSE:HDB). In terms of assets, both banks belong to the largest private banks in India and have operations in several other countries such as Bahrain, Hong Kong and Dubai. Nevertheless, just one of them seem to be a good pick with respect to their valuation ratios.

Fourth, from a logical point of view, many of the India-focused ETFs should also benefit from the ban. From the eleven India ETFs on the list of etfdb.com, the iShares India 50 ETF (NASDAQ:INDY), the WisdomTree India Earnings Fund (NYSEARCA:EPI) and the EGShares India Small Cap ETF (NYSEARCA:SCIN) are the top 3 funds with largest stakes in the financial sector - 31.5%, 23.7% and 23.6% respectively.

And lastly, selected alternative assets such as gold (NYSEARCA:GLD) and digital currencies (Pending:COIN) may attract investors` attention as well.

The bottom line

Because investing is a highly individual matter, everyone has to consider his/her own risk tolerance, financial situation and objectives. There are plenty of instruments and even if one gets the rationale for investing right, a wrong context, time horizon or other circumstances can totally reverse the expected outcome. In general, patience and calm mind are the essential prerequisites for success. In this case, I am long HDFC Bank, Mastercard, Alibaba and Bitcoin, but only on the grounds of my broader investment philosophy. Although India`s GDP growth may slow down as a result of the demonetization shock in the upcoming quarters, I believe that the overall long-term result will be net positive and therefore I do not plan to sell my positions at least in the next two years. But which companies or assets will be labeled as the winners of India's transition to a less-cash society? - I do not dare to guess.

Disclosure: I am/we are long BABA, MA, HDB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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