RBI cuts FY17 GDP growth 50 bps to 7.1% on demonetisation blow

Moneycontrol BureauThe Reserve Bank of India has trimmed GDP growth forecast for the current fiscal sharply to 7.1 percent from the 7.6 percent target earlier, citing demonetisation as the main reason. This is sharper than the 200-300 basis points fall that most economists and brokerages had been predicting.The central bank also kept benchmark rates unchanged, contrary to market expectations that the repo rate would be cut by 25 basis points."The outlook for GVA (gross value added) growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of SBNs (specified bank notes) which are still playing out," the RBI policy statement said.The central bank sees near term downside risks travelling through two major channels: (a) disruptions in economic activity in cash-intensive sectors such as retail trade, hotels & restaurants and transportation, and in the unorganised sector; (b) contraction in aggregate demand because of the 'wealth effect'.However, the RBI feels the impact of the first channel should ease as new currency notes come into circulation and greater usage of non-cash based payment instruments in the economy. The impact of the second channel--wealth effect--is likely to be limited, the RBI feels."Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks," the policy statement says.