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29
November 2016
Fitch
Ratings has lowered India's GDP outlook for the current year to 6.9% from the
7.4% estimated earlier. The Total Investment
& Insurance Solutions
According
to its Global Economic Outlook (GEO) report, released here on Tuesday, this was
due to the cash crunch created in the economy following the demonetisation
move.
"Economic
activity will be hit in the fourth quarter of 2016 by the cash crunch created
by withdrawal and replacement of bank notes that account for 86% of the value
of currency in circulation," Fitch Ratings said in its latest GEO report.
"Fitch
has revised its real GDP growth forecast down to 6.9% in the financial year
ending March 2017 (FY17), from 7.4% in the September Global Economic
Outlook," the report said.
The
impact on GDP growth would increase the longer the disruption continues, it
added.
Due
to the demonetisation, Indian consumers have not had the cash needed to complete
purchases, and there were reports of supply chains being disrupted and farmers
unable to buy seeds and fertilisers for the sowing season, it said.
"Time
spent queuing in banks is also likely to have affected general
productivity," the report noted. The Total
Investment & Insurance Solutions
In
October, Fitch had forecast 7.4% growth for the current fiscal for India. Fitch
had also added that the growth would accelerate to eight per cent only by
2018-2019, on account of a lagged impact of monetary easing. The Total Investment & Insurance Solutions
However,
the rating agency said that in the medium-term the effect of the currency
withdrawal on GDP growth was uncertain, but was unlikely to be large.
"Demonetisation
is a one-off event. People who operate in the informal sector will still be
able to use the new high-denomination bills and other options (such as gold) to
store their wealth," it said. The Total
Investment & Insurance Solutions
The
Reserve Bank of India's (RBI) policy rate cuts by a total 150bp since the
beginning of 2015 are likely to feed through to higher GDP growth, even though
monetary transmission has been impaired by relatively weak banking sector
health, it added.
A
surge in low-cost funding due to the demonetisation may remove a constraint on
banks that prevented lending rates from keeping pace with the RBI's policy rate
cuts in recent years, although this will depend on deposits remaining in banks
beyond the next few months, the report added. The Total Investment & Insurance Solutions
While
there were many facets to India's demonetisation measure making it difficult to
predict the impact on real gross domestic product (GDP) growth, it would still
be higher than China's in the medium term, Fitch Ratings had said earlier.
"In
China, we forecast real GDP growth of 6.4% in 2017, due to the impact of
macro-prudential tightening measures targeting the housing market," it
said.The Total Investment & Insurance
Solutions
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