Move could cut inflation, says Panagariya

Eradication of black money from circulation will have some impact on money supply, he says.

Arvind Panagariya.

The demonetisation drive will help lower inflation, NITI Aayog vice chairman Arvind Panagariya has said.

“All these makes me believe that their could be some moderation in inflation in the short term,” Mr. Panagariya said at the Economic Editors’ Conference on Friday. “Yields on sovereign bonds softened after the government announced that the present Rs. 500 and Rs. 1,000 currency notes will not be a legal tender from November 9.”

Eradication of black money from circulation would have some impact on money supply, he said.

“As the black money goes out of the system, the money supply will shrink to some degree. This will reduce the inflation rate in the absence of any open market operations by the RBI,” he said.

Savings growth Banks will see healthy growth in savings account deposits due to this exercise. “Savings that were kept in different forms particularly in the form of currency, they will now move into bank deposits. So we will see some surge in bank deposits,” he said.

Separately, Bibek Debroy, member of NITI Aayog, dismissed that the demonetisation will have any impact on economic growth.

“Real estate prices were already impacted due to several measures that the government had taken in the past,” he said.

Black money was never in the calculation of GDP figures, hence the present demonetisation drive will not impact growth, he said.