Advertisement
trendingNowenglish1950639https://zeenews.india.com/economy/bank-note-reform-to-depress-inflationary-pressures-in-india_1950639.html

'Bank note reform to depress inflationary pressures in India'

India's bank note reform has pushed up deposit growth and boosted liquidity that may in turn depress inflationary pressures, the Development Bank of Singapore (DBS) said Thursday.

'Bank note reform to depress inflationary pressures in India'

Singapore: India's bank note reform has pushed up deposit growth and boosted liquidity that may in turn depress inflationary pressures, the Development Bank of Singapore (DBS) said Thursday.

"The bank note reform has pushed up deposit growth, which in turn has boosted liquidity," said DBS in its daily market report.

With credit growth still weak, excess liquidity has pushed Indian ten-year bond yields sharply lower this week. This is in contrast to Asian price action, observed DBS.

Markets' based borrowing rates and banks' lending rates are also softening, it said.

Alongside the liquidity boost, the bank note reform is expected to depress inflationary pressures. This is addition to the already positive inflation trend, the bank said.

October 2016 inflation eased to 4.2 percent Year-on-Year from a peak of 6.1 percent in July 2016.

Easing food inflation was the main drag, in turn entirely due to a sharp fall in vegetables and pulses, while other segments were little changed, said DBS.

Core Consumer Price Index (CPI) inflation (ex-food and fuel) has been fairly steady in the 4.5 percent to 5.0 percent range for nearly a year.

In light of a normal monsoon, smaller rise in minimum support prices and administrative steps undertaken by the government, food inflation is likely to stay below 5 percent this year, according to DBS.

Global crude prices are up since the nadir in January this year, but have struggled to gain ground on an uncertain supply outlook.

From the demand end, the recent bank note reform is likely to hurt consumption, it cautioned.

"This, to some extent, will off-set the lift from higher public sector wages, posing downside risks to our inflation estimate of 4.8 percent for the year," it said.

The positive inflation path and RBI's lower real rate threshold, along with their non-committal to the 4 percent inflation target for FY17/18 leaves the room for a 25bp cut in the first quarter of next year (1Q17).

Contingent on the inflation outlook, odds for another 25bp cut within first half of next year (1H17) will also rise, it believes.

A cut in the December meeting, however, looks unlikely after the pre-emptive rate cut in October and volatile financial markets amidst rising external uncertainties.

The Indian Rupee (INR) tumbled to a five-month low yesterday, within striking distance of the 68 handle, while equities struggle to retain gains, noted the bank.

Until the currency crunch is resolved, more payments are likely to be settled through electronic modes of payments, plastic money and e-wallets, amongst others, believes DBS.

Stay informed on all the latest news, real-time breaking news updates, and follow all the important headlines in india news and world News on Zee News.

NEWS ON ONE CLICK