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Demonetization: Despite fall, GDP will bounce back sharply, says RBI Governor Urjit Patel

Demonetization: Despite fall, GDP will bounce back sharply, says RBI Governor Urjit Patel

Reserve Bank Governor Urjit Patel on Friday said India’s economic growth will make a “sharp V” recovery following the recall of old 500 and 1,000 rupee notes.

Patel also made a strong case for continuing with globalisation even in the face of a potential shift to trade protectionism under US President Donald Trump as India has benefited from open trade.

“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 demonetisation has happened at a fast pace and that was part of the plan.”

RBI last week lowered economic growth for the current fiscal to 6.9% from the previously projected 7.1%, but saw it bouncing back in a big way to 7.4 per cent in 2017-18.

He said the benefit of junking 86 per cent of currency in circulation will take time to fully play out and needs more work to ensure they are lasting.

Asked when India could achieve 9 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.
PTI