Five of the six members of the Monetary Policy Committee (MPC) were of the view that the effect of withdrawal of ₹500 and ₹1,000 bank notes, as part of the government’s demonetisation drive, on the economy is likely to be transient.
According to the MPC meeting’s minutes, released by the RBI on Wednesday, Governor Urjit Patel observed that the impact of the withdrawal of specified bank notes (SBNs) on growth and inflation, while uncertain, is transitory.
“Against this backdrop, it is important for monetary policy to stay focused on the medium term and strive to achieve, on a durable basis, the middle of the notified inflation target range — 4 per cent,” said Patel.
R Gandhi, Deputy Governor, said that there is uncertainty about the short-term impact of the decision to withdraw the legal tender status of ₹500 and ₹1,000 denomination bank notes on the macro-economy, although the impact is likely to be transitory.
Chetan Ghate, Professor, Indian Statistical Institute, said because of the increased uncertainty due to the withdrawal of SBNs, and virtually no hard data for November, it would be prudent to ‘wait-and-watch’ (on the policy rate). He elaborated that while a negative demand shock because of the withdrawal of SBNs will lead to a decline in consumption demand, the risks that such a reduction will have longer term effects by impinging on overall investment sentiment and investment activity are low.
Pami Dua, Director, Delhi School of Economics, said specifically, with the Indian Leading Index growth in a clear cyclical upswing and rising to a two-year high before the withdrawal of SBNs, the economic growth outlook going into the autumn months had become increasingly optimistic, underscoring the economy’s resilience to potential negative shocks.
Ravindra H Dholakia, Professor, Indian Institute of Management, Ahmedabad, felt that while the recent developments on SBNs can be considered as an exogenous shock to the economy that results in downward revision of the GDP growth forecast, it is widely perceived to be a transitory or temporary phenomenon.
While not directly referring to SBNs, Michael Debabrata Patra, Executive Director, RBI, observed that demand compression (possibly arising from withdrawal of SBNs) appears to be transient.
All six members favoured keeping the policy repo rate unchanged at 6.25 per cent.