Opinion DC Comment 08 Dec 2016 Cautious approach by ...

Cautious approach by RBI may be justified

DECCAN CHRONICLE.
Published Dec 8, 2016, 12:26 am IST
Updated Dec 8, 2016, 6:35 am IST
Some reports suggest it might take a few months to replace the volume of notes that were demonetised.
RBI Governor, Urjit Patel speaks during a presss conference announcing the RBI monetary policy in Mumbai on Wednesday. (Photo: PTI)
 RBI Governor, Urjit Patel speaks during a presss conference announcing the RBI monetary policy in Mumbai on Wednesday. (Photo: PTI)

The withdrawal of Rs 500 and Rs 1,000 currency notes not only affected the common man but also proved a hurdle in the way of the Reserve Bank taking a decision on whether to cut interest rates or not. It was widely expected that the RBI would cut rates between a quarter to half per cent as inflation is down and the banks are awash with funds, but RBI governor Urjit Patel disappointed all analysts and homemakers by keeping the rates unchanged.

However, there are hopes that banks could cut the equated monthly instalments (EMI) on loans soon as the cash reserve ratio (CRR, which commercial banks must keep with the RBI), which was impounded when money poured into the banks after demonetisation, was returned to them Wednesday. It was perhaps prudent on Mr Patel’s part to maintain a cautious approach while announcing the fifth bi-monthly monetary policy statement Wednesday. As he said, it’s too early to judge the full impact of the “supply disruptions in the backwash of currency replacement”, that could drag down growth. Much depends on whether this is transitory. The RBI’s monetary policy committee, headed by the governor, also revised downwards the gross value added from 7.6 per cent to 7.1 per cent for 2016-17 due to the uncertainty and the unexpected loss of momentum by 50 basis points, or half per cent, in the second quarter (July-September), and the effects of the withdrawal of currency notes.

 

The RBI also defended its action, which it said was taken after much deliberations, where the impact was reviewed and steps taken accordingly. While the central bank’s decision was honourable given that it was done to bring in transparency, curb black money and counterfeiting and forgery of currency notes used to finance terrorism and push India towards going digital, its implementation has caused tremendous hardship, specially in rural India, where banks and bank branches are scarce. There was also confusion on whether district cooperative banks were permitted to exchange old demonetised notes for new ones.

The RBI said its printing presses were working at full capacity and had till December 5 supplied four lakh crores of notes of lower denominations like Rs 10 and Rs 20, which was 19.1 billion pieces more than the whole of the last three years. This is of little comfort to people who are still finding it hard to get cash for their monthly expenses, not to mention the problems with the Rs 2,000 notes. Some reports suggest it might take a few months to replace the volume of notes that were demonetised. Some banks also placed ceilings on the amount that can be withdrawn, and the fact that the RBI is trying to reassure people that their money is safe and is still theirs is of little consolation.

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