RBI has taken a wise decision in not considering a rate cut, on global cues of course, belying expectations. The present alarming liquidity situation is a fall out of the volatile financial muddle created out of demonetisation and is not going to be perpetuity in any case. Reserve Bank of India (RBI) has recently proposed to absorb excess liquidity, using the recently sky-rocketed limits of Market stabilisation scheme. In the first policy review post demonetisation, the RBI has already lowered, the GDP growth forecast to 7.1% from 7.6%. Good thing that banks get sufficient liquidity and get something from reverse repo or SLR investment and reduce the burden of paying interest on saving bank accounts.
The decision of demonetisation is expected to go a long way in nullifying black money hoarded in cash, corruption, terror financing and fake currency. Despite some temporary hiccups and downside, the move is generally as provider of a big boost to national interests by discouraging parallel economy on one hand and giving a much needed push to the cashless economy on the other. Demonetisation aims to strengthen fight against corruption, black money and the activities of terrorists, anti-social and anti-national elements using fake currency.
It is now clear that the difficulty in identifying fake currency notes and its usage caused adverse effect to the economy of the country. The high denomination notes are used for storage of unaccounted wealth as has been evident from the large cash recoveries made by law enforcement agencies. Fake currency is being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the country.
The demonetisation could rewrite some macro parameters. However, largely the economists believe that the demonetisation is likely to have several spin-offs for Asia’s third largest economy. It could lead to lower interest rates, lower inflation, improved tax to GDP ratio, rising public investment and healthy public finances. In fact, it could change the face of Indian economy, improve the government’s fiscal position and tax compliance. According to rating agency CRISIL, the size of the cash economy will significantly shrink, as will black money generation avenues because of better trails of money flow. In all, demonetisation yield fruitful results in preserving the sovereignty of the country as a whole and give a cover all the lapses earlier taken to give the terrorists a long rope and leeway to cause attacks on regular basis threatening the security of the county. Thus, every adversity is an opportunity for success and we have an upper hand sooner or later.
(The views expressed by the author in the article are his/her own.)