What did PM Modi’s note ban do to India’s economy? Here’s what RBI staff think

Posted On Friday, 17 March 2017 09:57


A 10 March research paper prepared by the staff at the Reserve Bank of India (RBI)’s monetary policy department tells us that the 8 November demonetisation move by Prime Minister Narendra Modi has not done any major damage to the economy so far. Instead, the note ban promises several positives to the economy in the medium to long term, the preliminary assessment says. The RBI distances itself from the observations saying these are not its official views, but entirely belongs to those of the contributing staff.

The core theme of the paper is that “demonetisation has had some negative macroeconomic impact, which, however, has been transient as remonetisation has moved at an accelerated pace in last twelve weeks" — a view the RBI and government have maintained so far. More importantly, demonetisation is expected to have a positive impact over the medium to long term, the paper says. “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,” it says.

Here are some of the observations in the paper:

Economy: 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 GVA growth in Q3 of 2016-17 was felt mostly in real estate and construction, but because of stronger growth in agriculture, manufacturing, electricity, and mining, the overall impact on GVA growth was modest. With remonetisation progressing at a fast pace, the adverse impact is expected to have reversed from the latter part of Q4 of 2016-17. GVA growth is estimated to recover significantly in 2017-18. But what about the protruding disconnect between GDP and other high frequency macro indicators? Read an earlier comment on this here.

Banks: With the return of SBNs (specified bank notes or invalidated old notes), currency in circulation declined and deposits with banks surged. The share of ‘investment in government securities’ on the asset side of banks’ balance sheet increased significantly. Large surplus liquidity led to a significant improvement in monetary policy transmission as reflected in a significant decline in deposit and lending interest rates. The sharp increase in low cost CASA (low cost) deposits by banks is expected to have increased banks’ net interest income.

News source: First Post

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