Hailing the demonetisation step, Niti Aayog Vice Chairman Arvind Panagariya on Friday said the withdrawal of old higher denomination banknotes will check inflation and also help transactions move into white economy through the banking channel. Cleaning of the black money is a very positive step and as a result transactions will begin to move into white economy through the banking system, Panagariya said in his interaction with the media.
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“Savings that were kept in different forms particularly in the form of currency notes, they will now move into bank deposits. So we will see some surge in bank deposits,” he said at the Economic Editor’s Conference.
He, however, said that removal of black money from circulation will have some impact on money supply.
The money supply (M1 or narrow reserve money) would shrink because the black money which is in circulation would be taken out, leading to fall in supply, he said.
“As the black money goes out of the system, the money supply will shrink to some degree. This will reduce the inflation rate in the absence of any open market operation s by the RBI,” Panagariya added.
The former Chief Economist at the Asian Development Bank, however, said that “very likely” the RBI will do some open market operations” to replace at least partially the money supply.
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In a surprise move, Prime Minister Narendra Modi had on November 8 announced demonetisation of Rs 500 and Rs 1,000 notes and introduction of the new Rs 500 and Rs 2,000 ones with additional security features.