It is likely that the demonetisation move will curb illegal transactions and reduce the incidence of black money over the medium term. But the squeeze in liquidity has affected economic activity and dented consumer confidence.
Based on our current assessment, which presumes that economic activity would resume normalcy during Q4 FY2017, GDP forecasts may be revised downwards.
Even if consumption demand revives during Q4 of FY2017, retail inflation is likely to undershoot RBI’s March 2017 target of 5.0 per cent. So expect another 50 bps cut in policy rates by up to June 2017. Higher bank deposit mobilisation has already started transmitting to lower deposit rates, which would eventually feed into softer lending rates, although the latter is unlikely to have a commensurate impact on fresh lending.
Higher deposits mean more net interest income to banks. Additionally, bond yields have witnessed a sharp correction over the last two weeks, which reduces the interest outgo of the Central and state governments as well as other borrowers, on incremental funds raised through debt markets.