Rs 500, Rs 100 notes ban: The Reserve Bank of India (RBI) could undertake open market operations (OMOs) to partially restore the money supply (M1) that has been reduced in the aftermath of demonetisation of high value currency notes, Niti Aayog vice chairman Arvind Panagariya said on Friday.
Speaking at an economic editors’ conference, he said part of the black money would go out of circulation because of domonetisation, reducing money supply to that extent. This, he said could bring down inflation rate. “Very likely though, I hope the RBI will do some OMOs to replace at least partially this (reduced) money supply.”
According to SBI Research, the actual unaccounted cash not coming back to the system could be significantly higher than Rs 2.5 lakh crore. This will impact the RBI balance sheet in a positive manner, as the unaccounted money that is not coming back will reduce currency liability of RBI and hence the asset size should also get reduced proportionally. “This will open up a fiscal windfall for the government that can be used for need based funding,” it said.
With black money curbed, analysts project some decline in inflationary pressures as demand along with household inflation expectations are likely to go down. This could make RBI more comfortable on managing inflation in the future, increasing the possibility of rate cuts in the coming months.
Many analysts have expressed apprehension that gross domestic product (GDP) might see some negative impact in the short run due to consumption shock in the immediate term due to unavailability of cash.However, there are many positives a well. Panagariya said demonetisation would expand the size of the white economy through the banking system. Savings that were kept in different forms, particularly in the form of currency notes, would move to bank deposits. “So, we will see some surge in bank deposits,” he said. SBI
Research has estimated that around Rs 5 lakh crore would be flushed into banking channels as a result of this move.