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Demonetisation’s positives unlikely to be strong: Fitch

November 22, 2016 11:32 pm | Updated November 23, 2016 12:20 am IST - MUMBAI:

Fitch Ratings said on Tuesday the government’s decision on demonetisation that had created a cash crunch would constrain economic activities in the short-term forcing the credit rating agency to cut its GDP forecast for the fourth quarter.

“The impact on GDP growth will increase the longer the disruption continues,” it said.

Fitch also said benefits from the withdrawal of high-denomination currencies were unlikely to be enduring enough to result in a change in the outlook for India’s sovereign rating.

Government revenue

“The move has the potential to raise government revenue and encourage bank lending, but Fitch Ratings believes the positive effects are unlikely to be strong and sufficiently enduring to support credit profiles,” Fitch said in a statement.

“Demonetisation is a one-off event. People that operate in the informal sector will still be able to use the new high-denomination bills and other options (like gold) to store their wealth. There are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual,” it said.

On the impact of the move on the banking sector, Fitch said while banks would gain low-cost deposits, it remained to be seen whether the deposits would stay with banks beyond a few months.

“The positive impact on funding conditions will depend on deposits remaining in banks beyond the next few months. There is nothing to prevent them being withdrawn again,” it said. reaffirming its negative outlook on the banking sector. Banks have received more than Rs.5 lakh crore since November 9.

Asset quality

“Demonetisation could also affect the ability of borrowers in sectors that rely on cash transactions to service their loans, with negative effects on bank asset quality, which is why the RBI has temporarily allowed banks to give small borrowers more time to repay loans.”

Under-capitalisation of state-owned banks and weak investment demand were also among factors holding back lending, Fitch said.

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