‘India’s growth will rebound after cash ban’

Bloomberg

India’s growth will bounce back after a sharp slowdown triggered by Prime Minister Narendra Modi’s clampdown on cash, said central bank Governor Urjit Patel.
“Almost everyone agrees that the impact is going to be a sharp ‘V,’ that we would have a downgrade of growth for a short period of time,” Patel told CNBC-TV18 in an interview telecast Friday. “However the remonetization has happened at a fast pace and that was part of the plan.”
The benefits of the unprecedented November 8 decision to cancel 86 percent of currency in circulation will take time to fully play out and need more work to ensure they’re lasting, he said. His statement follows record outflows from Indian stocks last quarter as investors fretted about the impact of the demonetization as well as a US interest-rate increase that economists say has ended India’s easing cycle.
Patel kept the benchmark repurchase rate unchanged at 6.25 percent for a second straight meeting this month and changed the policy stance to “neutral” from “accommodative,” the first change since 2015. While consumer-price gains slowed, core inflation — which strips out volatile food and fuel costs — has been sticky and imperils the 4 percent mid-point of India’s inflation target range, Patel said.
“So, given how the inflation outlook changes, if at all, over the next few readings in terms of the data that comes about and our projections based on that for the next fiscal year,” a neutral stance gives the Reserve Bank of India more flexibility to cut, raise or hold rates as compared with an accommodative stance, he said.
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“The comments do suggest that the rate easing cycle is over,” said Shilan Shah, Singapore-based India Economist at Capital Economics. “Demand is picking up as is spending which means we will see a strong recovery in growth.” Patel also expressed concern about a potential shift to trade protectionism under US President Donald Trump but said financial markets have priced in most of the expected interest-rate increases from the Federal Reserve. India’s sound macroeconomic fundamentals — smaller budget deficit, flexible inflation targeting, high foreign-currency reserves and a modest current-account deficit — put the country in a good place to weather volatility, he said.