Note ban can transform economy: RBI

RBI revised downward the GVA growth for 2016-17 to 7.1% from 7.6%, with evenly balanced risks

The scrapping of old high-value notes could potentially transform the economy, even as the precise impact is yet to be ascertained, the Financial Stability Report said. The withdrawal of specified bank notes (SBNs), commonly referred as demonetisation, and the accompanying changes in income tax rules “are expected to result in a shift away from the significant dependence of Indian economy on cash-based transactions,” the report said. 

The immediate impact of the demonetisation, of Rs 15.44 lakh crore of high-value notes, was a surge in bank deposits with a commensurate fall in currency in circulation. This has led to a “dampening effect on inflation with a temporary loss of momentum in the growth of real gross value added (GVA).”

Accordingly, the Reserve Bank revised downward the GVA growth for 2016-17 to 7.1% from 7.6%, with evenly balanced risks. 

“However, the precise impact of the same on the economy may be difficult to capture at this stage and the disruptions in the cash-intensive sectors of the economy are likely to be transitory.”

“Notwithstanding the short-term disruptions in certain segments of the economy, withdrawal of SBNs is expected to significantly transform the domestic economy in the long run in terms of greater intermediation and increasing efficiency gains through adoption of digital modes of payments,” the Financial Stability Report said.