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22
November 2016
The positive effects of demonetisation
of Rs500 and Rs1,000 notes are unlikely to be of long term nature to support
banks' credit profile, said Fitch Ratings. The Total Investment & Insurance Solutions
The rating agency, which reaffirmed its
negative outlook on the Indian banking sector, said: "The move
(demonetisation) has the potential to raise government revenue and encourage
bank lending, but Fitch Ratings believes the positive effects are unlikely to
be strong and sufficiently enduring to support credit profiles." The Total Investment & Insurance
Solutions
"The impact on GDP (gross domestic
product) growth will increase the longer the disruption continues, but we will
already need to revise down our forecasts to reflect what will almost certainly
be a weak 4Q16," it said. The
Total Investment & Insurance Solutions
The cash crunch seems to be holding back
economic activity with reports about disruption in supply chains. The Total Investment & Insurance
Solutions
The move could boost government revenue
to the extent that demonetisation helps to move economic activity from the
informal to the formal sector, as more earnings would be declared, and it is
possible that this positive effect would soon outweigh the drag on revenue
collection from lower short-term GDP growth, Fitch said. The Total Investment & Insurance Solutions
Government finances may also benefit
from a proportion of high-denomination notes not being traded.
"This potentially significant
amount would be subtracted from the Reserve Bank of India's (RBI) liabilities,
and the authorities would have the option to transfer this windfall to the
government," Fitch said. The Total
Investment & Insurance Solutions
According to Fitch, India's sovereign
credit profile would benefit from an improvement in government finances, which
currently stand out as a major weakness.
Demonetisation is a one-off event, and
people that operate in the informal sector will still be able to use the new
high-denomination bills and other options (like gold) to store their wealth.
On the impact on the banking sector,
Fitch said some banks have already reported large increases in deposits since
demonetisation began. The Total
Investment & Insurance Solutions
"A surge in low-cost funding may
remove a constraint on banks that prevented lending rates from keeping pace
with the RBI's policy rate cuts in recent years," it said.
Furthermore, the positive impact on
funding conditions will depend on deposits remaining in banks beyond the next
few months, said the agency, adding that there is nothing to prevent them being
withdrawn again.The Total Investment
& Insurance Solutions
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