The Impact of Demonetization on the Short-Term and Long-Term Returns of India’s Leading Real Estate Index

Abstract

This article examines the short-term and long-term impact of demonetization on the daily and monthly returns of the Standard & Poor Bombay Stock Exchange (S&P BSE) Realty Index, India’s leading real estate index. Demonetization is supposed to result in a liquidity crunch in the market and have a negative impact on real estate activity and real estate stock market returns. The results suggest that the S&P BSE Realty Index had statistically lower returns immediately after the announcement of demonetization. However, the impact dissipated within a month. Furthermore, when we compared the monthly returns from the S&P BSE Realty Index with similar returns on the Bombay Stock Exchange (BSE) Sensex index, we found no long-term impact of demonetization on the Realty Index. Our results suggest that markets reacted to demonetization as an opportunity to move to a cashless system that will reform the real estate sector and attract global investors, including hedge funds, to invest in the real estate market of India due to growing demand for residential and commercial real estate.

TOPICS: Real estate, emerging markets, wealth management, currency

Key Findings

• • Markets reacted to demonetization as an opportunity to move to a cashless system that will reform the real estate sector and attract global investors including hedge funds to invest in the real estate market of India due to growing demand for residential and commercial real estate.

• • On the day of the event and the day following the event, the S&P BSE Realty Index returns were negative. These returns were short-term only and dissipated a few days after the announcement.

• • Short-term after-effects of demonetization are consistent with previous studies that analyzed the effect of demonetization due to introduction of single currency, Euro.