While the effect of demonetisation lingered on food prices, it was transient on the broader economy, the Reserve Bank of India (RBI) said on Tuesday.
“The Monetary Policy Committee observed that the transitory effects of demonetisation had lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits and vegetables, pulses and cereals,” the RBI said in its submissions to the Standing Committee on Finance. “At the same time, the effects of demonetisation on the broader economy were sector-specific and transient.”
GDP growth rebounds
Following the “transient” slowdown in the April-June quarter of 2017-18 due to demonetisation and the uncertainties in the run up to the roll-out of GST, GDP growth rebounded in the July-September quarter and has sustained momentum thereafter, the RBI said.
The central bank also made it a point to note that the shortfall in the government’s non-tax revenue should be viewed in the context of demonetisation and the impact this had on the surplus the RBI could transfer to the Centre.
“On the fiscal front, the shortfall in non-tax revenue relative to budget estimates needs to be viewed inter alia in the context of the costs of demonetisation reflecting in lower transfer of surplus from the Reserve Bank,” the RBI said. It added that while cash in circulation as on March 31, 2018 accounted for 101.8% of its pre-demonetisation levels, it worked out to only about 88% of the three-year trend if there had been no demonetisation.
“In H1:2017-18 [first half of financial year 2017-18], the lingering effects of demonetisation weighed heavily on the growth of currency in circulation (CiC) which remained in contraction mode,” the RBI added. “In H2:2017-18, however, the tide turned, and the rapid pace of remonetisation finally lifted the growth in CiC into positive territory.”
“While CiC as on March 31, 2018 accounted for 101.8% of its pre-demonetisation level, it works out to around 88% of its underlying 3-year trend had there been no demonetisation,” it said. It added that monetary and credit indicators recovered in the second half of financial year 2017-18, with credit growth of scheduled commercial banks re-emerging as a “significant source of financing for the commercial sector” from its historic low in March 2017. The monetary transmission from the policy rate to the banks’ deposit and lending rates improved during 2017-18 due in large part to the “demonetisation-induced slosh of liquidity”, but it remained uneven across sectors and bank groups, the RBI said.
The RBI noted that demonetisation had a sharp effect on the volume of digital transactions, which grew from about 900 million transactions in October 2016 to about 1,500 million in December 2016 and to 1,750 million in June 2018.
