Was talk of RBI rate cut after demonetisation another jumla?

It is expected GDP growth will be down from 7.6% to 7.1 %. The demonetisation has hit the Indian economy hard.

Was talk of RBI rate cut after demonetisation another jumla?

The reasons for going in for demonetisation of Rs 1000 and Rs 500 notes have been changed a multiple times by the Narendra Modi government. Among the "many beneficial" effects of the demonetisation was also said to be that the RBI will cut interest and other rates and the markets will be flush with cash, giving scope for lending to industry and thus spur employment, demand and allied things.

That moment of reckoning got over with the policy review today. All the talk of rate cut has turned out to be another case of jumla. The RBI kept repo rates unchanged at 6.25 per cent ending all the palpitation and expectation of such sops in the currently cash-starved economy.

Market experts and economists were expecting a 0.25 per cent rate cut to support the economy which is recovering from the debilitating shock of the November 8 announcement demonetising 86% of the cash in circulation.

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Many brokerages have already downgraded their GDP growth outlook for the year. The cash-reliant economy hit badly already due to demonetisation more than expected. After the RBI policy review, analysts downgraded their outlook for Indian stock markets because the currency ban is seen knocking economic growth in the next few quarters.  

The rate cut was expected to help revive private investments and act as a counter to the demonetisation drive, which slated impact growth in the short-term.

The RBI has also lowered the Gross Value Added (GVA) growth for 2016-17 from 7.6 per cent to 7.1 per cent. But, the RBI isn’t overly worried about growth slowing post the demonetisation.

“While supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence – short-term developments that influence the outlook disproportionately warrant caution with respect to setting the monetary policy stance. If the impact is transient as widely expected, growth should rebound strongly,” the RBI said

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Since the demonetisation the total deposits in banned currency notes has inched close to Rs 11 lakh crore, according to some reports. As per the RBI, the total value of the Rs 500 and Rs 1,000 notes in circulation till March 2016 was Rs 14.18 lakh crore

The RBI was estimating that money worth Rs 2.5 lakh crore may not come back into the banking system post demonetisation of high-value notes.

But the recent details of the amount of cash return are raising doubts over the purpose and efficacy of the entire exercise. Experts say that the possible reason why RBI kept repo rates unchanged is that RBI might have swept the excess liquidity in the system into its reserves. It is said that RBI may cut rates in its February review.