demonetization

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India’s surprising economic potency last quarter will only renew debate over how much its unprecedented cash ban has curtailed growth and how quickly activity will bounce back.demonetization

While the Reserve Bank of India and the government are backing a sharp V-shaped recovery, analysts including those at the local unit of Moody’s Ratings predict a slower turnaround after Tuesday’s growth estimates showed India shrugged off the impact of the sudden withdrawal of 86 percent of its currency with only a brief slowdown.

demonetization

demonetization

The Reserve Bank of India has already signaled an end to its interest rate easing cycle and with growth set to gather pace it’s likely to boost inflationary pressures in the coming months. And as newly-printed bills hit the banking system, replacing the old 500 and 1,000 rupee notes that were voided overnight on Nov. 8, the government is expecting a swift jump back

 

Indian self-governing administration bond yields appear to have bottomed out and are headed higher as investors and analysts including those at Morgan Stanley expect a rate ramble most probably in 2018. Expectations of higher rates from an inflation-fighting central bank are also helping the rupee, which has in good health after hitting a record low in November.

demonetization

Still Smarting

Yet India’s economy is still smarting over Prime Minister Narendra Modi’s shock currency withdrawal that saw India’s vast shadow economy stall and forced millions to spend days lining up to withdraw cash or exchange their worthless notes.

demonetization

The costs have been huge, especially for the informal sector which does the bulk of its transactions in cash. There was a sharp dip in consumption towards the end of 2016, highlighted by a contraction in overall auto sales in December. Industrial growth was hit and demand for loans from companies’ remains at a record low. Along with uncertainty over the introduction of a nationwide sales tax due later this year, there are few signs that much-needed private sector investment will spearhead a recovery.

Some economists and lobby groups say official growth figures do not account for job and revenue losses at small companies.

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