Note ban might affect some sectors in Q4: RBI

Remonetisation should be completed in 2-3 months, says RBI Deputy Governor Viral Acharya

The impact of demonetisation might be seen on some sectors of the economy in the fourth quarter (January to March, Q4) of the current financial year (2016-17, FY17), said Reserve Bank of India Deputy Governor Viral V Acharya on Monday. He added the remonetisation exercise should be completed in two to three months.

Prime Minister Narendra Modi had announced the demonetisation of old Rs 500 and Rs 1,000 notes on November 8. Economists and analysts had expected the ensuing cash crunch to adversely affect gross domestic product (GDP) growth in the third quarter (October-December). But with growth at 7 per cent, note ban seemed to have not affected the economy at all.

Asked if the spillover of demonetisation could extend to the January-March quarter, Acharya, who came to participate in the G-20 preparatory meeting in the finance ministry, said the impact could be felt in some segments. “Ultimately, the cash shortage is like the liquidity shock and unless it had led to a substantial wealth destruction, one would expect its effects to be quite temporary. I’m not saying that the temporary impact is not hard on some parts of the economy; you would expect the effect to be temporary,” he said

There may be a couple of sectors, such two-wheeler sales, where there is slightly slower rebound, he said.

Asked about the GDP estimate, he said, “You can see our MPC (Monetary Policy Committee) resolution, which is that our estimate was actually reasonably close to that (of CSO estimate). Of course, the drivers may have been slightly different.”

He said there were a couple of issues people have raised — how much of the informal sector gets fully captured other than through its links to the formal sector — which would be interesting and worth thinking about.

For the entire 2016-17, GDP growth was projected to be 7.1 per cent in the second Advanced Estimates, the same as the first Advanced Estimates. This was despite the fact that the first Advanced Estimates did not take into account the impact of demonetisation, while the second Advanced Estimates did so. 
 

Acharya also said the impact of the note ban would only be temporary and would help in bringing informal sector into the mainstream. “I think everyone should keep in mind that the remonetisation is taking place at a very fast pace. We have some way to go, but I think we expect that within two to three months we will reach full currency in circulation. It will be slightly lower, but it is in that ballpark (number),” he said.

The newly appointed RBI deputy governor also said asset quality review (AQR) is on the track. The RBI had set a deadline of March 2017 for completion of the AQR exercise for public sector banks.

It had embarked on the AQR exercise in December 2015 and asked banks to recognise some top defaulting accounts as non-performing assets (NPAs). This has had a debilitating impact on banks’ numbers and their stocks. The move resulted in a spike in bad assets with lenders recognising over Rs 1 lakh crore of bad assets in the December quarter alone.