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Guest Column Did the markets go up 21% due to demonetization?

Did the markets go up 21% due to demonetization?

Amit Trivedi examines if the Nifty rise of 21% for the one-year period since the announcement of demonetization is a coincidence, correlation or cause.
Amit Trivedi Nov 13, 2017

Recently, a message was doing the rounds on social media platforms. This message showed that the Nifty returns were 21% for the one-year period from 8th November 2016 to 7th November 2017. This period of course marks the one-year period since the Prime Minister Narendra Modi had announced demonetization of Rs. 500 and Rs. 1,000 notes on 8th November last year. While the start date was the date of the announcement, the end date was the first anniversary of the event.

The message suggested that the markets gave a 21% salute, which was somewhat akin to giving a 21-gun salute to demonetization. This may be interpreted as saying that the markets approved demonetization or that the rise in the markets was a direct outcome of demonetization.

In the financial world, one would come across many such messages where some linkage or connected is seen between two events.  However, it is important to analyse whether this is just a coincidence or is there a correlation between the events.

Statisticians and researchers answer this question by looking at many observations. If the pattern appears more often, they conclude that there may be some correlation. In the absence of “statistically significant” number of observations, they rule out the hypothesis and conclude that this could simply be a coincidence and not correlation.

Getting multiple observations is not possible in this case, since demonetization is a rare event. Hence arriving at a conclusion based on just one event is a cardinal error. Those who understand probability would agree.

Since the data is not available, there is no way we can conclude whether this is a correlation or simply a coincidence.

Let us assume for a moment that these events are indeed correlated. Even then, it is important to check the cause-and-effect relation between the two events. Is the market appreciation a result of demonetization? How does one ascertain this? Once again, the only way to do so is to have a look at large sets of data, which is not available as mentioned earlier.

By the way, Donald Trump became the President of the United States on the same day PM Modi announced demonetization. Should we (and can we) say that the markets gave a 21-gun salute to Donald Trump? Guns seem to be more appropriate for Trump than for India going by what is happening in the US!

Be careful when you look at such reports. Humans are pattern-seeking animals. We try to identify patterns, even when one does not exist. Simple coincidences are presented as correlations and we tend to believe that one depends on the other. Let us be careful. Such reports make for an interesting reading but the same could be harmful to your portfolio’s health.

  • Amit Trivedi

These are the author’s personal views. Amit is a leading trainer in the investment markets and is the author of a book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.

He can be reached at amit@karmayog-knowledge.com.

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jaideep · 11 months ago
DeMo forced down bank FD rates to record lows, as banks were flush with funds, yet the banks had neither the appetite to lend, nor the customers to lend to. This is in a sense forced investors to invest in mutual funds, which would benefit these investors more than the FDs in the long run. As Mr Trivedi says correctly, there is no link between DeMo and financial market inflows, but then politicians love to take credit for anything positive that happens, even if it is by coincidence.
Dutt · 11 months ago
Thanks Amit for the word of caution for linking the events. However, reasons may be as many as we can guess, but sudden spurt of inflows is in itself a challenge. While it feels nice to have large inflows, it is a challenge in itself, for proper deployment of this public capital and to have them invested for a long period of time. Deployment opportunities need to grow as well ...
R Varadarajan · 11 months ago
A very well balanced report with a sensible word of caution
ajay gupta · 11 months ago
Thanks for the lovely interpretation.We all tend to gyrate and do mental gymnastics in co relating...and are masters at arriving at conclusions.We seek patterns and our confirmatory biases make us start believing them.Caution needed to be exercised ,at all times.A good read does not necessarily make it a correct one!
pankaj Kapadia · 11 months ago
So lets check what according to me resulted in 21% return. All the money lying outside bank came back to the system. SIP inflows of some 6000 crore was the result. FII kept selling for past 3 months. Mf and DII kept buying. No fundamental and no technical worked. Only and only liquidity drew the market. 21 salute was just and accident.
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