Post demonetisation in India, International Monetary Fund has downgraded India’s growth rate by a full percentage point to 6.6 percent for fiscal 2016 citing the new policy of cashless economy as its reason. But K V Kamath, chief of New Development Bank of BRICS countries says that he doesn’t see how growth rate can go down, as according to his calculations, “it should go up. After a slight dip.” He explains that it is premature to decide about GDP, what will be the impact on inflation, interest rates and lending capacity of banks. But says that “lower interest rates will benefit India”.
He says that he sees India’s demonetisation policy will do good in the future. “If you see after nearly 50 days the situation was brought to normalcy,” he told a CNBC TV 18 reporter in the World Economic Forum meeting in Davos.
He explained that people thought that “pay day” November 30 and December 31 is going to be a huge issue but it passed. The decision to put a limit to withdrawals was also backed by Kamath, as he said that only very few Indians require to spend more than Rs 25, 000 in a week in cash. Only 24 lakh Indians earn more than Rs 10 lakhs in a year and that means Rs 1 lakh in a month, so Rs 25, 000 as a limit was not incorrect, according to him. The execution of the demonetisation scheme may have been criticised but the first step “to track the money in the system digitally” has been achieved, he said.
He said that for the impact of lower interest rates to be positive for India there are certain preconditions one needs to look at.
“We need interest rates to down so that you have infrastructure spending and consumption,” he said. But at this point of time looking at the liquidity in system, the interest rates are being held in place.
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In a hypothetical situation, he explains that if inflation and consumer price go down post demonetisation as predicted by various economists does then interest rates will be pressurised to go down and the bond deal will also go down. According to Kamath, these combination of things is good for the banks. He explains that if bond deals go down US will have tragedy profits and they will have to leave their woes of incremental capital behind.
If one is out of the well for government bonds that would mean a profit for about Rs 1, 50, 000 crores in Indian banking system. And, if one per cent lending rates come down then the picture will be clearer if the economy will go up or down, he said.