RBI’s assessment of impact of demonetisation on Indian economy…

A big surprise from RBI as it has released its assessment of impact of demonetisation on Indian economy. All this while the stunning silence of the central bank has been so puzzling and irritating.

There is nothing much to note as much is already known via multiple news items and analysis. The most awaited data of how much old notes came back to the system is still not there (atleast I could not find it in the big document).

The report says important consequence is rise in digital transactions which was not even the original objective:

Demonetisation announced on November 8, 2016 was aimed at addressing corruption, black money, counterfeit currency and terror financing. Although demonetisation holds huge potential benefits in the medium to long-term, given the scale of operation, it was expected to cause transient disruption in economic activity. The analysis in this paper suggests that demonetisation has impacted various sectors of the economy in varying degrees; however, in the affected sectors, the adverse impact was transient and felt mainly in November and December 2016. The impact moderated significantly in January 2017 and dissipated by and large by mid-February, reflecting the fast pace of remonetisation. The latest CSO estimates suggest that the impact of demonetisation on GVA growth was modest.

Currency squeeze due to demonetisation along with seasonal factors pushed food inflation significantly down but has not had much impact on inflation excluding food and fuel. A surge in deposits led to a sharp expansion in the consolidated balance sheet of scheduled commercial banks and created large surplus liquidity conditions. These were managed by the Reserve Bank of India through a mix of conventional and unconventional policy instruments. There has not been any significant impact on the external sector. There has been a sharp increase in the number of accounts under the Pradhan Mantri Jan Dhan Yojana and the deposits in such accounts have also surged. Financial re-intermediation may have received a boost following demonetisation.

An important consequence of demonetisation has been the sharp increase in the use of digital transactions.

It has lots of statistics which could be used for future analysis provided we can trust these numbers…

By now, we all know the impact was never intended to be on economics. The real impact always was to unsettle India’s political  environment.  In a brilliant set of moves, the government has used demonetisation to build a narrative around corrupt and non-corrupt nd has used it well during recent elctions.

How Indian central bank got itself to be centre of Indian politics is quite something. The success/failure of demonetisation is more likely to reflect in election results and not as much in economic data..


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