The Reserve Bank attributed the 50-bps lowering in its GVA growth estimate to 7.1 per cent this fiscal year to the lower-than-expected expansion in the second quarter and not to demonetisation that has hurt consumption activity massively. The impact on the GDP growth at best would be 15 bps, said the central bank, adding the downside risks arising from the November 8 noteban is only a temporary phenomenon.
“Much of it is due to the Q2 growth revision which has surprised everyone on the downside,” RBI Executive Director Michael Patra, a member of the Monetary Policy Committee (MPC), said at the customary post-policy presser here. It can be noted that GVP growth cooled down to 7.1 per cent in the September quarter.
Patra, however, was quick to distance the cash recall exercise, which has massively slashed consumption and brought the consumer confidence index to the negative territory for the first time in eight years, from the RBI lowering its GDP forecast, saying it is a “temporary” phenomenon that will hurt the overall growth by only 0.15 per cent.
“The SBN (specified banknotes) is also factored in, but that is only 15 bps. And we regard that as a very transitory phenomenon. Monetary policy should not be reacting to any transitory phenomenon,” he said.
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In the fifth bi-monthly policy, the RBI said in the near term the risks to growth could travel through “short-run disruptions in economic activity” in cash-intensive sectors such as retail trade, hotels & restaurants and transportation, and in the unorganised sector and aggregate demand compression associated with adverse wealth effects.
“Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC (pay panel) award, GVA (gross value-added) growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks,” it said.
The economy expanded by 7.1 per cent and 7.3 per cent, respectively, in the first and the second quarter of the ongoing fiscal.
“The outlook for gross value-added growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of specified bank notes which are still playing out.”
RBI said the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy.