Cash Crunch To Be Over By Feb-End; GDP Growth To Bounce Back Faster; Credit Growth Rebound On Cards

The State Bank Of India’s (SBI) Economic Research Department (ERD) released its Ecowrap report yesterday (6 January) The report analyses two things: how much more time it will take before cash crunch comes to a halt and things return to normalcy; and how the recent steep rate cuts by banks will spur credit demand.

In its earlier Ecowrap report of 19 December, the ERD had estimated that 53 per cent and 75 per cent of the total value of extinguished notes will most likely be supplied by December-end and January-end respectively. The ERD had predicted this assuming that the RBI will print only Rs 500 currency notes throughout December and January. However, the latest RBI data shows only 44 per cent of the demonetized currency has been replaced. Clearly, this means that the RBI is also printing notes of small denominations apart from Rs 500 notes.

Now, the whole calculation changes if the RBI is going to print small currency notes along with Rs 500 ones. If it continues to do so, then by this month end, only 67 per cent of the currency would get replaced and not 75 per cent which the Ecowrap had earlier predicted. By February end, at the same rate, as much as 80-89 percent of the total currency may get replaced. In any case, the crisis is not going to last longer because things will be pretty much normal by the end of next month.

As this Swarajya column had argued, the bottomline is by the time you receive your salary for the month of February, in all likelihood, things will be as normal as they were at the start of November. In fact, things have already started returning to normal as the Prime Minister had promised on 8 November. ATMs are working and are flush with money. The queues at banks have disappeared despite this being the period when most people withdraw their salaries. The commentators who were not so much predicting as wishing for doomsday scenarios have been disappointed.

It also means that the GDP growth will bounce back faster than many economic pundits had assumed.

Post demonetisation, credit growth, already very poor, has hit rock bottom. But the silver line is that demonetisation has triggered steep rate cuts by banks. Ecowrap notes that a reduction in repo rate by 125 basis points (bps) between January 2015 to March 2016 (which translated into transmission of 70 bps by banks to customer), led to a significant jump in credit to housing to the tune of Rs 1.5 lakh crore. With rate cuts now being 90 bps at one go, the report says, credit growth rebound in at least the housing sector is a real possibility.

Ecowrap doesn’t expect the RBI to cut rates further in February “as global uncertainties may again play spoilsport.” It also expects inflation trajectory to remain significantly benign.