Over to Jaitley, says RBI PDF Print E-mail
Thursday, 08 December 2016 00:56
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Surprisingly, RBI says note-ban impact only 15bps


Given the slowing of industrial PMI to 52.3 in November from 54.4 in October and the stunning contraction in the services PMI to 46.7 – this is the first time it has been below 50 since June 2015 – it is odd that RBI should estimate the impact of demonetization as a mere 15bps at a time when most economists are talking of a disruption of at least two quarters. While RBI has lowered its FY17 GVA projection to 7.1% as compared to 7.6% earlier, it was clarified at the monetary policy press conference that the bulk of the downward revision was due to the CSO lowering its Q2 estimates earlier. In which case, with RBI refusing to cut repo rates in response to a slowing economy, any attempt to revive growth has to come from the finance ministry – though a 10-15bps cut in the MCLR is likely due to the CRR relaxation and the extra liquidity with banks, this helps only new loans. How weak the growth impulse is can be seen from the fact that, even before demonetization, bank credit growth to industry in October hit a six-year low and, Nomurra economist Sonal Varma had estimated that, if public administration and agriculture were to be excluded, GVA growth in Q2FY17 decelerated to 6.7% as compared to 7.6% in Q1FY17 – the monetary policy statement also acknowledges the weak underlying economic activity including capital formation contracting for the third consecutive quarter.


Since RBI Governor Urjit Patel was quite emphatic in scotching talk of a special dividend to the government arising out of, say, Rs 2-3 lakh crore getting extinguished because of the note-ban – he said even if the money was to not come back, the RBI’s liability to pay would remain – Jaitley’s ability to stimulate the economy will depend on how much money he gets by way of extra taxation. This can happen by way of more disclosures in the second version of the Income Disclosure Scheme or, if money has been laundered by way of companies showing higher sales, by way of higher advance taxes on those sales. Whether this increase will outweigh the fall in tax collections due to a slowdown in economic activity, of course, will depend upon how long the impact of the demonetization lasts.


Though the markets expected a rate cut to stimulate growth, the central bank’s primary concern seems to have been the rupee. With the dollar strengthening against all currencies, the rupee continues to fall and, with the likelihood of a Fed rate hike, the rupee will be under more pressure as outflows increase. With various commodities like oil and steel seeing prices harden, along with a weaker rupee, the RBI’s concern is that this will put further pressure on inflation. While RBI has chosen to keep its options open till it is able to get more clarity on how various factors, including demonetization, play out, it is likely it will have to lower its growth estimates further – a lowering of growth estimates and an increase in inflation forecasts is not a happy situation to be in. 


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