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Faster remonetisation will boost economy in Q4, says RBI Governor Urjit Patel

Discretionary consumer demand expected to bounce back: Urjit Patel at MPC meeting on Feb 7-8.

By: ENS Economic Bureau | Mumbai |
February 23, 2017 2:29:39 am
RBI, reserve bank of india, RBIO governor, urjit patel, economic growth, indian economy, economy boost, indian express news, india news, business news, banking RBI Governor Urjit Patel

Reserve Bank Governor Urjit Patel has said economic activity is expected to pick up from the latter part of the fourth quarter of fiscal 2016-17 with “the remonetisation of the economy taking place at an accelerated pace over the last two months”.

“Discretionary consumer demand, which got impacted in the immediate aftermath of demonetisation, is expected to bounce back,” Patel said during the two-day Monetary Policy Committee meeting on February 7-8. The minutes of the meeting were released by the RBI on Wednesday.

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“Rapid remonetisation implies likely swift reversal of the aggregate demand loss and the significant transmission to borrowers of easy funding conditions at banks suggests unlikely further transmission of a rate cut by banks,” RBI Deputy Governor Viral Acharya said. Patel said that shifting monetary policy stance from accommodative to neutral will provide sufficient flexibility to move the policy rate in either direction. All the six members of the Monetary Policy Committee had voted in favour of the “resolution to keep the policy repo rate unchanged at 6.25 per cent”.

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Patel further said that limited data available on the corporate sector performance in the third quarter suggests that sales growth may have improved relative to the previous quarter. “The Union Budget for 2017-18, while being prudent, has stepped up expenditure on infrastructure and emphasised affordable housing. Global growth is projected to be higher in 2017 than 2016,” Patel said.

“These factors, along with improved monetary transmission, have markedly improved growth prospects for 2017-18 compared to the current year,” he said. “The balanced budget, by focusing on fiscal stability and expenditure reorientation to rural and housing, seemed to exonerate the Committee from the burden of skewing rates to bridge the output gap and instead allowed the Committee to focus squarely on the inflation-targeting mandate,” Acharya said. “Such a time, while difficult for interest-rate setting, appears right for pushing forward on structural reforms of the banking sector: its asset quality and resolution, and its recapitalisation needs — both factors that have stunted credit growth at banks; and, the normalisation of administered small savings rates that have prevented a seamless transmission of monetary policy to bank funding and lending rates,” he said.

“As the transitory impact of demonetisation recedes and remonetisation sets in, the banks’ MCLRs are likely to increase marginally. Moreover, under the current global environment, the real neutral rate of interest in India seems to be higher than the one for most of the developed countries. However, their future policy direction indicates rapid strengthening of the rates,” MPC member Ravindra Dholakia said.

According to MPC member and RBI executive director Michael Patra, vegetable prices may have been impacted by demonetisation, but they also exhibit strong seasonal behaviour and tend to turn up as the winter gets over.

The RBI said growth for 2016-17 is projected at 6.9 per cent with risks evenly balanced around it. “Demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand,” it said.

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First published on: 23-02-2017 at 02:29:39 am

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