Mumbai: The Reserve Bank today cut the economy's growth forecast for current fiscal to 7.1 per cent, from 7.6 per cent earlier, saying that short-term disruption in economic activity and demand compression arising out of demonetisation have led to downside risks to growth.
It said that in the near term the risks could travel through "short-run disruptions in economic activity" in cash-intensive sectors such as retail trade, hotels and restaurants and transportation, and in the unorganised sector and aggregate demand compression associated with adverse wealth effects.
"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 RBI said in the fifth bi-monthly Monetary Policy Statement for the current fiscal.
The Indian economy expanded by 7.1 per cent and 7.3 per cent in the first and second quarter of the ongoing fiscal. "The outlook for Gross Value Added (GVA) 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 specified bank notes (SBNs) which are still playing out," it said.
RBI said the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy.
The central bank also said that demonetisation could result in short-run disruptions in economic activity in cash-intensive sectors like retail trade, hotels, restaurants and transportation, and the unorganised sector, RBI said today.
The withdrawal of old Rs 500 and 1,000 notes "could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3 (October-December period", the central bank said in the Fifth Bi-monthly Monetary Policy Statement Resolution of the Monetary Policy Committee.