Note ban impact was transient, says RBI staff paper

A research paper by the staff at the Reserve Bank of India (RBI) has found that the impact of demonetisation on the real economy has been transient, “given the information available so far.”


The paper, Macroeconomic Impact of Demonetisation — A Preliminary Assessment, was prepared by the staff of the monetary policy department with contributions from other departments. The conclusion of the paper, the authors warned, was not necessarily the official view of the central bank.


However, the same view has been expressed by the Reserve Bank in its monetary policy document as well. Besides, RBI Governor Urjit Patel has also maintained the view that demonetisation impact has been transient.


“The analysis in this paper suggests that demonetisation 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,” the paper said.


The impact on economic growth was felt modestly in the third quarter ended December, while the organised sector remained largely resilient.


The study quoted the Central Statistics Office (CSO), stating that the impact of demonetisation was felt mostly in real estate and construction. “But because of stronger growth in agriculture, manufacturing, electricity, and mining, the overall impact on GVA (gross value added) growth was modest.”


With remonetisation progressing at a fast pace, the adverse impact was expected to have reversed from the latter part of Q4 of 2016- 17. GVA growth was estimated to recover significantly in 2017-18, the paper said, adding headline inflation outlook in the near term would hinge on how food inflation evolved.


While banks mostly benefited due to a surge in deposits, this would need to be adjusted against the cost of managing the process of demonetisation, the paper said. “As regards other segments of the financial sector, some NBFCs, especially MFIs, were adversely affected, in terms of disbursals and collection of repayments.” But the situation began to improve from late December.


“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 paper added.

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