New Delhi, Feb. 17 (PTI): India's economic growth will make a “sharp V” recovery from the impact of the November 8 demonetisation of old 1000- and 500-rupee notes, Reserve Bank of India Governor Urjit Patel said on Friday.
“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,” he told CNBC-TV18 in an interview. “However, the re-monetisation has happened at a fast pace and that was part of the plan.”
The RBI last week lowered its forecast for economic growth for the current financial year to 6.9 per cent from the previously projected 7.1 per cent, but saw it bouncing back in a big way to 7.4 per cent in 2017-18.
He said the benefits of demonetisation would take time to fully play out and need more work to ensure they are lasting.
The demonetisation, which removed 86 per cent of the currency in circulation, hit many sectors as it was followed by an acute cash shortage.
Asked when India could achieve nine per cent GDP growth, he said it is difficult to predict sustainable growth rates.
Higher growth rate is possible if very fundamental reforms, especially in factors of production like land and labour, are undertaken, the Governor said.
“Now how much higher than 7.5 that we are achieving so far is difficult to say. But the fact is we need to grow at some point faster than we are now,” he said. “I think 7.5 per cent growth rate is not something to be disappointed about.”
The six-member monetary policy committee (MPC) headed by Patel had last week kept interest rates unchanged at 6.25 per cent for the second straight meeting and changed policy stance to 'neutral' from 'accommodative'.
The change in stance, he said, gives more flexibility to cut, raise or hold rates as compared with an accommodative one on inflation outlook.
”The best way that central bank can support growth on a durable basis is to ensure inflation is low, stable, there is financial stability and that is the role the central bank plays. Very few countries grow at high growth rate if inflation is high and volatile. So, I think we are doing our bit to support higher growth rate, but on a durable basis,” he said.
The RBI governor expressed concern over the US moving towards protectionism under Trump.
”I think it is a cause of concern for the world, I think it is a cause of concern for the emerging markets in terms of creating financial volatility. I don't think anyone will be safeguarded from it. We have to manage this as it plays out,” he said.
Some things are in India's control, he said. The Union budget has reduced the fiscal deficit, the central bank has flexible inflation targeting in mind, India’s reserves are at over $360 billion, and the current account deficit is modest.
“So, we need to look after these attributes of macro economic stability and that will allow us to withstand some of these sources of turbulence that may come from a wider world,” he said.
On protectionism under the Trump administration, he pointed out that India has sustained opening up of its economy since 1990s and there is no need to change that stance.
He said it could get “messy” if other economies react to what the US does.
”Hopefully, wiser heads will prevail and we won't go down that road, but I think it is important that we should be on the side of keeping borders open with respect to trade and factors of production (land and labour),” the Governor suggested.
He said Asia may come in for special treatment because almost two-thirds of the US trade deficit in goods are with respect to Asia.