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Banks win big from India's rupee restrictions, says AAA-rated CIO

Banks win big from India's rupee restrictions, says AAA-rated CIO

The Reserve Bank of India and other private banks are the biggest beneficiaries of the Indian government’s decision to scrap rupee notes in denominations of 500 rupees ($7.40) and 1,000 rupees ($14.70).

According to Citywire AAA-rated Jonathan Schiessl, who is CIO of Ashburton Investments, the withdrawal of the notes in an attempt to curb black money in India is a positive and radical move.

‘Effectively what happens is if you don't change them in and you go past the deadline the Reserve Bank of India gets a massive one off dividend. That is predicted at the moment to be $25-$30 billion, which is fairly significant from an Indian perspective,’ he told Citywire Selector.

‘We are debating how they will spend that windfall and after what has happened to the common man, who has certainly been suffering, that there might be some sort of policy to try and mollify that particular segment.’

Schiessl added that this money would allow the government to focus on issues facing the poor in India and would not be used for token subsidies or temporary measures to buy votes before the 2017 Indian presidential elections.

He said there was support for the measures but it would take time to properly get rid of the black economy. Financials make up 23.02% of the Ashburton India Equity Opportunities fund and Schiessl said they were one of the biggest beneficiaries of the move.

‘It might be half a year, even three quarters of a year until we readjust to what's happened and ultimately how business is done. But, it is fantastic news for government finances and a great time to be banking in India because they have taken an additional $44 billion in deposits so far,’ he said.

Bollywood hopefuls

Elsewhere, Schiessl’s second largest sector in the fund is consumer discretionary at 22.47%. The fourth largest holding in the fund is Arvind Textiles at 5.15%. The firm is targeting the younger generation who want to dress in western fashions like the Bollywood stars in the Indian film industry.

‘They are the biggest jean manufacturer in the world, which is the cash cow of the business. The exciting part of the business is over the past few years they have been pumping the money they have been making out of their traditional textile business into a high brand retail apparel business.

‘They have got the licenses to sell Polo, Tommy Hilfiger, a whole bunch of brands which they roll out across India, appealing to the aspirational consumption story.’

Over three years to the end of October 2016, the Ashburton India Equity Opportunities fund returned 90.16% in Indian rupee terms. This compares to a rise of 64.52% by its Citywire-assigned benchmark, the S&P BSE 500 TR, over the same time frame.

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