Macroeconomic Impact of Demonetisation-A Preliminary Assessment

Reserve Bank of India Rbi

Working Papers from eSocialSciences

Abstract: Demonetisation announced on November 8, 2016 was aimed at addressing corruption, black money, counterfeit currency and terror financing. Although demonetisation holds huge potential benefits in the medium to long-term, given the scale of operation, it was expected to cause transient disruption in economic activity. The analysis in this paper suggests that demonetisation has impacted various sectors of the economy in varying degrees; however, in the affected sectors, the adverse impact was transient and felt mainly in November and December 2016. The impact moderated significantly in January 2017 and dissipated by and large by mid-February, reflecting the fast pace of remonetisation. The latest CSO estimates suggest that the impact of demonetisation on GVA growth was modest. Currency squeeze due to demonetisation along with seasonal factors pushed food inflation significantly down but has not had much impact on inflation excluding food and fuel. A surge in deposits led to a sharp expansion in the consolidated balance sheet of scheduled commercial banks and created large surplus liquidity conditions. These were managed by the Reserve Bank of India through a mix of conventional and unconventional policy instruments. There has not been any significant impact on the external sector. There has been a sharp increase in the number of accounts under the Pradhan Mantri Jan Dhan Yojana and the deposits in such accounts have also surged. Financial re-intermediation may have received a boost following demonetisation. An important consequence of demonetisation has been the sharp increase in the use of digital transactions.

Keywords: demonetisation; corruption; black money; currency; terror finance; scale of operation; economic activity; remonetisation; seasonal factors; inflation; food; fuel (search for similar items in EconPapers)
Date: 2017-03
Note: Institutional Papers
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Citations: View citations in EconPapers (5)

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