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A Reserve Bank of India paper has assessed that the impact of demonetisation on the real economy has been transient, given the information available so far.
The analysis of the central bank’s paper suggests that demonetisation (scrapping of Rs 500 and Rs 1000 bank notes during the November 9, 2016 to December 30, 2016 period) impacted various sectors of the economy.
“However, the adverse impact, in general, was short-lived as it was felt mainly in November and December 2016. The impact moderated significantly in January and dissipated by and large by mid-February 2017, reflecting an accelerated pace of remonetisation,” it said.
In February, the RBI had pegged down GVA growth to 6.9 per cent for FY2017 against its earlier projection of 7.1 per cent. It had assessed the impact of demonetisation on GVA growth at about 33 basis points for FY2017. A basis point equals one-hundredth of a percentage point.
As the impact of the liquidity shock was assessed to largely dissipate by mid-February, growth was estimated to bounce back in 2017-18, the paper said.
Inflation
The paper said the 240 basis points decline in food inflation during November 2016 to January 2017 was the combined effect of record pulses production, large winter arrivals of vegetables and some fire sales due to decline in demand following cash squeeze.
“However, inflation, excluding vegetables, moderated only marginally. Also, inflation, excluding food and fuel, remained sticky. The headline inflation outlook in the near term will hinge on how food inflation evolves,” it said.
CASA deposits
The sharp increase in low-cost CASA (current account, savings account) deposits by banks is expected to have increased banks’ net interest income. However, this will need to be adjusted against the cost of managing the process of demonetisation, said the paper.
As regards other segments of the financial sector, the paper assessed that some non-banking finance companies (NBFCs), especially micro finance institutions, were adversely affected, in terms of disbursals and collection of repayments. However, the situation for most NBFCs began to improve from late December 2016.
Jan Dhan accounts increased by 23.3 million post demonetisation, while deposits under Jan Dhan accounts increased by Rs.18,700 crore (41 per cent).
Overall assessment
The paper observed that overall, demonetisation has had some negative macroeconomic impact, which, however, has been transient as remonetisation has moved at an accelerated pace in the last 12 weeks.
“More importantly, demonetisation is expected to have a positive impact over the medium to long-term. In particular, there is expected to be greater formalisation of the economy with increased use of digital payments.
“The reduced use of cash will also lead to greater intermediation by the formal financial sector of the economy, which should, inter alia, help improve monetary transmission,” the RBI said.
Given the partial information that is available post demonetisation so far, the analysis, especially of growth, is only preliminary in nature, it said. It should, therefore, be possible to make an analysis in greater detail as more data becomes available in the coming months.
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