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India was one of the worst markets in the last quarter of 2016. The Fund moved in line with the market, thereby erasing all of the gains made throughout the year.

In a bold move to fight the huge black market and counterfeit currency, Government of India demonetized Rs 500 and Rs1000 notes and approximately 86% of the currency in circulation (~10.4% of GDP) was made illegal tender overnight. While the move appeared to be receiving public support, it has created immediate business disruptions. In the short term, limited liquidity can severely hurt consumption (especially discretionary spending), real estate / construction activity as labour is largely paid in cash, informal trade and freight movement across the country.

However, the move is expected to be positive in the long term as more money flows into the formal banking system which can be used more productively as compared to idle cash and lead to an overall reduction in interest rates, government’s tax revenue increases which can be used to boost infrastructure creation, and widening of the tax net which can overtime lead to a reduction in overall tax rates. Together with the implementation of GST, a reduction in dependence of cash will be beneficial for the organized segment of the industry. We remain bullish on India.

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