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Introduction

Currency Demonetisation is an act of banning the existing denominated currencies which are in circulation. The purpose of demonetisation could vary from curbing inflation to eliminating counterfeit currencies from the economic system. On November 8, 2016, Indian Prime Minister Narendra Modi declared that `500 and `1000 denominated currencies were no longer considered a legal tender. This bold decision banned 86% currency notes in circulation. The Indian Government’s major objectives of currency ban was, to eradicate counterfeit currency, prevent tax evasion, wipe out black money, and prevent terrorism financing activities. This giant step was applauded by modern thinkers as a step to encourage the country towards a cashless economy.

Many sectors of the economy were affected positively as well as negatively by the currency demonetisation. The note ban announcement reflected on the stock prices of various firms. In this paper, the researchers have documented the impact of currency demonetisation announcement on the Indian securities market. The rest of the paper has been categorised into four sections. Second section of the paper deals with theoretical background of the study. The third section elaborates methodology adopted. The fourth section discusses the major findings of analysis and the fifth section summarises the paper.

Theoretical Background

This section deals with theoretical background of the demonetisation of Indian currency. Demonetisation of a currency refers to a major macroeconomic policy decision which could be announced by the Union Government of a country or the Central Bank of a Nation. It enables the nation to move from cash economy to digital economy. Curbing black money circulation in the economy, introducing new currencies in the system, accumulating more bank deposits and increasing in tax collection could be identified as significant impact of currency demonetisation. Since 1946, Indian economy has witnessed currency demonetisation of various denominations. The first demonetisation of Indian currency was announced in the year 1946 for `1000 and ` 10,000 notes whereas after independence `1000, `5,000 and ` 10,000 currency notes were reintroduced by the RBI. To curb the black money in India, the high value currencies of `1000, `5,000 and `10,000 notes were demonetised in the year 1978. On November 2016, ` 500 and `1000 denominated currencies were demonetised.

The Indian currency demonetisation has happened recently, and researchers could witness little empirical evidence on the impact of currency demonetisation on the securities market. The following empirical papers have documented the impact of demonetisation;

Ritika Jain (2017) has examined the impact of Indian currency demonetisation announcement on the banking sector stocks. For this purpose, the researchers have considered 25 Public Sector Banks’ (PSBs) stocks and 15 Private Sector Banks’ stocks listed at National Stock Exchange (NSE). Event Study Methodology was adopted to study about the impact of demonetisation on banks’ stocks. Cumulative Average Abnormal Return (CAAR) and Average Abnormal Return (AAR) were applied to assess the performance of banks’ stocks. It could be witnessed from the research that during the post-demonetisation period, the PSBs have given the highest return than the private banks.

S.Suresh & C.Yogalakshmi (2017) studied about the effect of macroeconomic policy announcements on  the market value of ten  banks’ stocks. The researchers have considered currency demonetisation and bi-monthly monetary policy announcements as major macroeconomic announcements. Event Study Methodology was adopted to find out the effect of policy announcements on the market value of stocks. Average Abnormal Return (AAR) and Cumulative Abnormal Return (CAR) were applied to the data. Paired tests were used to measure the effect of policy announcements on the return of banks stocks. The findings revealed that there was no significant effect of demonetisation and monetary policy announcements on the returns of banks stocks.

It is well observed from the above empirical evidence that there was no such study documented the impact of currency demonetisation announcement on the securities market as a whole.  This motivated the researchers to find out the impact of currency demonetisation announcement on the securities market.

Methodology

The following objectives are framed for in this study;

1.  To know the trends in Indian Primary Market during demonetisation

2.  To find out return  on sectoral indexes of BSE and NSE  during demonetisation

3.  To obtain the developments in mutual fund investments during demonetisation

The researchers have adopted an analytical research design to carry out the objectives of the study. 

Index returns are calculated using the following formula;

Ir = {(Ic-Io)/(Io)} x 100 where Ir – Index Returns,
Ic – Closing Index Value, Io – Opening Index Value

The researchers have followed Event Study Methodology to find out the impact of demonetisation announcement on the sectoral index returns of BSE and NSE. Index values of Reality, Banking, FMCG, Automobile and Information Technology have obtained during a pre and post event window of ten days. To benchmark the sectoral returns, Sensex and Nifty are also considered for analysis.

Results and Discussions

In the month of November 2016, the Indian firms made threePublic Issues through IPO method which accumulated to the tune of ` 520 crore whereas during November 2015, there was only one IPO issued for the value of ` 1 crore. Indian capital market witnessed three Public Issues through FPO and Rights Issue Method during November 2016 which has collected ` 689 crore whereas during November 2015, only two Public Issues through FPO and Rights Issues gathered
` 310 crore.  In spite of demonetisation, Indian firms have the ability to accumulate colossal amount of capital in Indian securities market. (Refer TABLE 1)

The announcement of currency demonetisation has resulted in positive returns on the indices of Banking, FMCG, Auto, Information Technology (IT) and negative returns have recorded in the Reality Sector. Among the listed firms traded at BSE and NSE, the share price of ICICI Bank Ltd increased by 5.7%, State Bank of India rose by 8.2%, and the Yes Bank Ltd was  up to 6.9%. The State Bank of India and the ICICI Bank have reported their highest return over 14 months. This has resulted in the outperformance of Bank Index among the other sector indices on BSE and NSE. (Refer FIGURE 1)

Compare to the BSE Index Sensex and BSE’s sectoral indices, the Nifty and other sectoral indices of NSE have outperformed on the day of demonetisation announcement. (Refer FIGURE 1).

The following Table 2 reveals the impact of demonetisation announcement on the performance of sectoral indices during pre and post announcement event. All sectoral indices including Sensex and Nifty considered for this study have reported negative returns during pre demonetisation announcement period. On the announcement day, except reality sector in both BSE and NSE all sectors have registered positive returns.  This could be further observed that the reality sector has given positive returns on t+1 event window. The performance in terms of positive returns is continued only for banking sector stocks on t+1 event window. The poor performance in terms of rate of return could be witnessed till t+07 event window. On t+08 event window, the indices of Banking, Auto and FMCG sectors have recorded positive return on BSE and NSE. The Sensex and Nifty also reported positive returns on t+08 event window. Negative index return could be observed from t+09 to t+10 event window. 

After demonetisation announcement, Indian mutual funds have mobilised ` 13.99 lakh crore of funds from Indian investors in November 2016 which was 3% more than the funds mobilised in October 2016. Indian investors have redeemed ` 13.63 lakh crore as compared to redemption of ` 13.28 lakh crore in October 2016. Indian mutual funds have a net inflow of ` 36,019 crore in November 2016 which could be identified from the difference between the total funds mobilisation and the total funds redemption. Indian mutual funds have managed assets worth of ` 16.50 lakh crore which was 1.29% higher than the assets managed by the Indian mutual funds during October 2016. (Refer TABLE 3)

Summary and Conclusion

The study has focused on the impact of currency demonetisation announcement on the various sections of the Indian securities market such as resources raised by primary market, trends in the secondary market and resources raised by mutual funds. The results of the study revealed that demonetisation announcement have a positive impact in terms of resources raised from the primary market, performance of sectoral indices of BSE and NSE and trends in resources mobilised by mutual funds. One could further study about the individual performance of stocks listed at BSE and NSE, changes in shareholding pattern of firms, performance of mutual funds by NAV, and trends in FII investment during demonetisation announcement.

— S. Suresh is an Assistant Professor, Department of
Management Studies, Rajalakshmi Engineering College

— E.Niraimathi is associated withDepartment of
Management Studies, Rajalakshmi Engineering College

— A.Sowmya is associated withDepartment of
Management Studies, Rajalakshmi Engineering College