A month into the Central government’s currency flushout decision, the Reserve Bank still sees inflation as the bigger threat looming ahead. Post demonetization, demand and production may have taken massive hits — but the RBI expects its impact on the country’s GDP to be short term, of the order of only 10-15 basis points. While revising growth projections downwards from 7.6 to 7.1 percent, the RBI in its latest monetary policy review has forecast that low prices due to demonetisation could be temporary, and that rising oil prices can actually threaten efforts to contain inflation within 5 percent in the fourth quarter (Jan-Mar) of the current fiscal. Thus it is that the RBI’s monetary policy committee has chosen to keep the repo rate, the interest rate at which it lends to the banks, unchanged at 6.25 percent. This has poured some cold water on market hopes, where the expectation was of at least 25-50 basis points cut in the repo rate (which would have led to lowered bank lending rates to companies and individuals). A section of experts have dubbed this a downright conservative if not hawkish mindset, as lower bank loan rates would have helped revive private investments in an atmosphere of great market uncertainty; even SBI chief Arundhati Bhattacharya has termed the RBI’s status quo on rates as ‘disappointing’. The suspicion is that the RBI has itself adopted a ‘wait and watch’ policy to see out this turbulent phase, while keeping a wary eye on US and EU central banks which are likely to hike rates next month. Alysts have pointed out that bunks are now flush with funds with people rushing to exchange or deposit their invalid Rs 500 and Rs 1000 notes. The estimated Rs 11-12 lakh crore in deposits has created a huge liquidity in the banking system, but once the withdrawal limits are withdrawn (as they must, sooner or later), a large part of these deposits will again move out and may create some imbalance. The likely further weakening of the rupee against a resurgent dollar may also stoke inflatiory pressures due to trade and current account deficits.
However, the Reserve Bank has given some relief to banks by withdrawing the additiol cash reserve ratio requirement, the extra proportion of deposits banks were required to park with the RBI, which will now help bring down the cost of funds for banks. Expectedly, RBI Governor Urjit Patel has claimed that the demonetisation decision was not taken in haste, that that there is no ‘trust deficit’ among the public, that there is adequate supply of new currency. But he has conveniently remained silent on the all-too-frequent rule changes, the continuing cash crunch, and the myriad implementation goof-ups. Surely, these hassles are going to impact on public trust in the monetary and banking system, never mind the RBI’s cocky claims to the contrary. It is all very well for the central bank boffins to take a long-term view of the challenges ahead for the economy, but for crores of workers in the informal sector, petty traders, farmers and the like — tiding over the ‘short term’ uncertainty is literally a life and death matter. The threat to the agriculture sector from the currency disruption is all too real, with the rabi sowing season well under way. If the sudden cash squeeze ends up hurting half the rabi produce, some economists fear it could slice off 3 percent from overall growth figures. This could aggravate the long-term distress in the farming sector, whose contribution to the country’s GDP is down to around 2 percent. On the other end of the scale is the services sector, accounting for over half the country’s GDP — which has shown a distinct contraction in November as per the Nikkei index. The Central government on Tuesday admitted ‘visible and hidden costs’ in reducing cash volume in the economy, while announcing a series of sops to encourage cashless transactions. But it must go all out on the cyber security front to protect digital payment providers and bank ATMs from hackers. No time must be lost in ensuring a reliable security set-up, for lakhs of people are rushing headlong into cashless options, and risking hard-earned savings.