Demonetisation has not led to lower economic growth, RBI said today while citing “surprises” like dip in inflation as well as GDP growth for maintaining status quo on policy rates. “Data shows that the slowdown in economic activity set in during Q1, FY17, well ahead of demonetisation,” Governor Urjit Patel told reporters, reacting to the dip in growth in the revised growth figures released by CSO. He also gave out numbers to support the claim including resilience in the cash-dependent mining and quarrying, rural wages continuing to be elevated and sturdiness in other sectors like manufacturing, electricity, hotels, transport and communication in the second half of last fiscal, 2016-17. Deputy Governor Viral Acharya said it was lack of clarity in the narrative, where there have been “surprises” in dip in inflation to 3 per cent in April and the revision in growth to 6.1 per cent by CSO.
“We have a combination of a big surprise in the inflation number as well as the CSO revisions. We are just trying to get a finer grip on what is exactly happening in the economy over the next few months,” he said. He said RBI has revised down its estimate on inflation projection to 3.5-4.5 per cent for H2 FY17 as against the 5 per cent earlier, and will wait for more clarity before acting upon rates. “We need to see through the next couple of months data to see if inflation remains within these medium term projections that we have or whether its a surprise even relative to these revised projections,” he said.
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Patel said the inflation number may have come lower due to lingering of the transitory effect that has kept it low since November and also on supply glut conditions in respect of pulses, cereals and vegetables. “With so many moving parts and the outlook clouded with uncertainties, the Monetary Policy Committee (MPC) decided by vote of five to one to stay on hold and wait for greater clarity to emerge with incoming data,” he added. He was, however, quick to add the risks to inflation like rising rural wages, robust consumption demand and imminent implementation of 7th pay panel report due to which RBI decided to stick to its neutral stance and go for a status quo. “The inflation outcomes really reflect a combination of factors which are really difficult to disentangle at this stage with just one data point,” executive director Michael Patra, also a member of the MPC, said.
“We need to really unravel these effects and then take policy action. Not at a state where the outlook is very blurred,” Patra added. When asked if the dissenting view on the MPC — one member was not in favour of the majority decision — represents a maturing of the panel, Patel said it reflects a “wait and watch” approach. “It strongly suggests that a wait and watch approach has been taken and the diversity of the views that are in the MPC constitution has meant that we did have a vote that was not unanimous,” he said.