Transitory effects of demonetisation have lingered on: RBI -Governance Now

Transitory effects of demonetisation have lingered on: RBI

The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks

GN Bureau | June 7, 2017

#Reserve Bank of India #RBI #demonetisation

The Reserve Bank of India on Wednesday kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 percent and the Monetary Policy Committee noted that incoming data suggest that the “transitory effects of demonetisation have 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 Central Statistics Office (CSO) latest releases on national income accounts and industrial production attest to the effects of demonetisation on the broader economy being sector specific and transient, as well as to the noteworthy resilience of private consumption. At this stage, it is difficult to isolate these factors or to judge the strength of their persistence.

As the year progresses, underlying inflation pressures, especially input costs, wages and imported inflation, will have to be closely and continuously monitored, it said.

Noting that inflation has fallen below 4 percent only since November 2016, the MPC remains focused on its commitment to keeping headline inflation close to 4 percent on a durable basis keeping in mind the output gap.

“The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place. Premature action at this stage risks disruptive policy reversals later and the loss of credibility.

Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data,” said an RBI statement.

On May 31, 2017, the CSO released quarterly estimates of national income accounts for Q4 of 2016-17, provisional estimates for 2016-17 and revisions for the preceding five years.

The growth of real gross value added (GVA) for 2016-17 has been pegged at 6.6 percent, 0.1 percentage point lower than the second advance estimates released in February 2017. Underlying the revision is a downward adjustment in services sector growth in Q4 for the constituents of construction, financial and professional services, and real estate.

Estimates of agriculture and allied activities have been upgraded to incorporate the all-time high production of food grain and horticulture in the year.

The new data reveal that a slowdown in activity in both industry and services set in as early as Q1 of 2016-17 and became pronounced in Q4. Moreover, the deceleration of activity coursing through the year has had underlying drivers that have been in operation since Q2.

Read: RBI’s Second Bi-monthly Monetary Policy Statement, 2017-18

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