Demonetisation Impact: RBI cuts growth forecast to 7.1% from 7.6% for FY 2016-17

Mumbai: The Reserve Bank on Wednesday cut the economy's expansion forecast for current fiscal to 7.1 percent, from 7.6 percent earlier, saying that short-term disruption in economic activity and demand compression arising out of demonetisation have led to downside risks to growth.

It said that in the near term the risks could travel through "short-run disruptions in economic activity" in cash- intensive sectors such as retail trade, hotels and restaurants and transportation, and in the unorganised sector and aggregate demand compression associated with adverse wealth effects.

"Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 percent to 7.1 percent, with evenly balanced risks," the RBI said in the fifth bi-monthly Monetary Policy Statement for the current fiscal.

The Indian economy expanded by 7.1 percent and 7.3 percent in the first and second quarter of the ongoing fiscal.

"The outlook for Gross Value Added (GVA) growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of specified bank notes (SBNs) which are still playing out," it said.

RBI said the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy.

RBI today kept short term lending rate unchanged saying it is adopting a wait and watch policy to see the effect of withdrawal of 500 and 1000 rupee notes from circulation.

"It is appropriate to look through the transitory but unclear effects of the withdrawal of SBNs while setting the monetary policy stance. On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook. Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance," RBI said.

RBI said the second quarter GDP quarter was lower than projected because of deeper than expected slowdown in industrial activity.

"Manufacturing slowed down both sequentially and on an annual basis, with weak demand conditions and the firming up of input costs dragging down the profitability of corporations," it said.