RBI says demonetisation not done in haste, cuts growth forecast to 7.1%

Mumbai, December 7

The Reserve Bank on Wednesday cut the economy’s expansion forecast for current fiscal to 7.1 per cent, from 7.6 per cent earlier, even as it said the demonetisation decision was taken after detailed deliberations and not in haste.

RBI also said that Rs 11.85 lakh crore or 80 per cent of junked notes have come back into the system.

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RBI Governor Urjit Patel also promised to maintain steady supply of new currency to ease cash crunch.

RBI said short-term disruption in economic activity and demand compression arising out of demonetisation had led to downside risks to growth.

The benchmark Sensex reversed its two-day rally as it fell 156 points today to end at 26,237 as RBI left interest rate unchanged at 6.25 per cent, contrary to market expectations, in its first policy review since the currency switch.

RBI Governor Patel left the repo rate intact in his second monetary policy.

It said in the near term the risks could travel through “short-run disruptions in economic activity” in cash- intensive sectors such as retail trade, hotels and restaurants and transportation, and in the unorganised sector and aggregate demand compression associated with adverse wealth effects.

The Indian economy expanded by 7.1 per cent and 7.3 per cent in the first and second quarter of the ongoing fiscal.

“The outlook for Gross Value Added (GVA) growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of specified bank notes (SBNs) which are still playing out,” it said.

The RBI said the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy.

The RBI kept short-term lending rate unchanged saying it is adopting a wait and watch policy to see the effect of withdrawal of Rs 500 and 1,000 notes from circulation.

RBI Deputy Governor R Gandhi said that almost Rs 11.85 lakh crore in the scrapped Rs 500/1000 notes have come back to the banking system.

Gandhi further said printing presses of RBI and the government are working to full capacity and all efforts are being made to reach the notes in every part of the country.

RBI also urged the public not to hoard the new currency and put it into circulation to ease the situation.

“Large quantity of notes of various denomination have already been supplied... I appeal to the public that they may not worry about availability. It is continuously coming. If they freely re-circulate the notes...this problem will not be there,” Gandhi said, adding that “hoarding of notes helps nobody’s cause”. — PTI