The Monetary Policy Committee (MPC) of the Reserve Bank of India had warned that the withdrawal of Rs 500 and Rs 1,000 notes could transiently interrupt some industrial activity in November-December due to delays in payments of wages and purchases of inputs, said the minutes of the Monetary Policy Committee meeting on December 6 and 7.
“A fuller assessment is awaited … The committee felt that the assessment is clouded by the still unfolding effects of the withdrawal of specified bank notes,” the minutes said. RBI Governor Urjit Patel said the impact of the withdrawal on growth and inflation, while uncertain, is transitory.
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“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 i.e., 4 per cent,” Patel said. “There are other risks to this objective. The full cost-push effects of higher allowances under the 7th Central Pay Commission award will impact inflation outcomes and inflation expectations in 2017-19. Also, the implementation of the goods and services tax could produce a one-off step-up, albeit modest, in inflation,” Patel added.
The RBI kept the Repo rate unchanged at 6.25 per cent in the monetary policy review.
MPC member Ravindra Dholakia said, “While the recent developments on SBNs can be considered as an exogenous shock to the economy that results in downward revision of the GDP forecast, it is widely perceived to be a transitory phenomenon. If it is so, it is not advisable to respond with a policy intervention that involves longer distributive lags, otherwise it can create avoidable uncertainty in policy stance and action in future.”
Chetan Ghate, member of MPC, 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.”
“In the services sector, the outlook is mixed with construction, trade, transport, hotels and communication impacted by temporary SBN effects, while public administration, defence and other services would continue to be buoyed by the 7th CPC award and one-rank-one-pension (OROP). GVA (gross value-added) by financial services is expected to receive a short-term boost from the large inflow of low-cost deposits,” the committee said.
The steady expansion in acreage under rabi sowing across major crops against last year should build on the robust Q2 performance. Industrial activity remains weak. Among the core industries in the IIP, the output of coal contracted in October due to subdued demand, while the production of crude oil and natural gas shrank…, the panel said.
“Inflation excluding food and fuel remains sticky. Global oil prices have firmed up. Global financial conditions pose a threat to macroeconomic and financial stability, with large fluctuations in capital flows and asset prices imparting volatility which gets transmitted into inflation. This uncertainty shows no sign of subsiding, and is likely to get accentuated in the coming year as US macroeconomic and trade policies realign,” Patel said.
Even as growing credibility in the disinflation process in India has lowered households’ inflation expectations from double digits, they remain elevated, Patel said.