The Modi government has taken the extraordinary step of cancelling 85% of the Indian currency base. Cash holders have until year-end to exchange larger denomination banknotes for new, smaller ones. The move is an attempt to short-circuit a sizeable black economy. Our concern is the abrupt, albeit temporary, halt in economic activity nationwide. Cross-border investors appear to be using the news to stonewall further allocations, while they assess the impact of the deflationary move on consumer confidence and interest-rate policy. We do not expect them to return to the market until at least the second quarter of 2017, when fresh economic data could stir interest. The IMF characterized this wait-and-see attitude by offering an oblique comment about how the move needs to be “handled prudently.” ■
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