Indian stocks cut losses and the rupee turned positive on Wednesday as the country's move to withdraw larger banknotes from circulation was seen as a positive for the economy, ushering transparency and leading to easing inflation.
The recovery offset an initial bout of uncertainty about the banking measures, which had been compounded as Republican candidate Donald Trump shocked investors by winning the U.S. presidential election.
The broader NSE Nifty ended down 1.3 percent after earlier falling as much as 6.3 percent, while the rupee strengthened to a one-month high after earlier falls had prompted the central bank to intervene in currency markets. Bonds held on to gains from earlier in the session.
Prime Minister Narendra Modi's unexpected announcement on Wednesday to remove from circulation 500 and 1,000 rupee notes was seen as likely to hit consumer demand in the short-term.
But any pain will turn to longer-term gains, as it will help usher in transparency, boost taxes and lower inflation, economists said.
"In the near term, adjustments might prove difficult, but beyond that it will be hugely beneficial for all of India and India's reputation globally," said Jaspal Bindra, chairman of financial firm Centrum Group.
The partially convertible rupee was at 66.48 per dollar versus its previous close of 66.6150/6250 in late afternoon trading after hitting 66.40, its highest since Oct. 4.
Bonds held on to its gains, with the benchmark 10-year bond yield down 13 basis points at 6.67 percent. Benchmark yields touched a session low of 6.64 percent, its lowest level since June 9, 2009.
Real estate shares were among the biggest decliners, reflecting a belief that large amounts of black money are steered towards property transactions. The Nifty Reality index ended down 11.6 percent, with DLF Ltd, India's biggest property developer, down 17.3 percent.
But banking shares recovered from earlier falls with the Nifty Bank sub-index ending flat after earlier falling as much as 7 percent as coffers are expected to swell when people start tendering their cash.
Sectors with exposure to the U.S. economy were among the biggest decliners due to uncertainty about Trump's presidency. The Nifty IT index, which exports heavily to the United States, ended down 3.25 percent.
(Additional reporting by Darshana Sankaraman, Tanvi Mehta, Samantha Nair, and Aby Joseph Koilparambil in BENGALURU; Editing by Eric Meijer)