Demonetization has already hit activity, which experts estimate will hit India's GDP figure this year.
Morgan Stanley and Bank of America Merill Lynch have revised downwards their growth estimate for India in the post demonetized economy.
The government's move to suck out nearly 86% currency from the economy, in value terms, by decommissioning the use of Rs 500 and Rs 1,000 notes, on November 8 midnight, has left small businesses, markets, and the informal workforce, in shambles while certain companies are revising their output in the tight liquidity situation.
Morgan Stanley, quoted by Cogencis, has cut India's GDP growth estimate to 7.4% from 7.7% for 2016. For 2017, the growth forecast has been slashed to 7.6% from the earlier 7.8%. For 2018, the growth is pegged at 7.8%, Cogencis said.
Bank of America Merrill Lynch, in a research note by Indranil Sen Gupta, their India Economist, cut its growth forecast for India. "We see a 30bps risk each to our 7.4% FY17 and 7.6% FY18 growth forecasts with demonetization set to hurt activity in December as well," the note said.
While Prime Minister Narendra Modi assured that the situation will return back to normalcy in 50 days after demonetization (December 31), RBI Governor Urjit Patel who gave an interview to the media on Sunday for the first time since the demonetization move, said that government and the central bank were constantly reviewing the situation and assured that efforts were being made to ensure "genuine and honest people are not hurt."
Inflation
Under the inflation target regime, the RBI had set a target of 5% inflation by March 2017.
BofA-ML said it saw Consumer Price Index-led "(CPI) inflation at 4.2% in October, well on track to RBI's 5% March 2017 target." Morgan Stanley said inflation would be below 4.5% by March-end.
Upcoming monetary policy review
In the aftermath of the demonetization move, Morgan Stanley said that it expected RBI to cut the repo rate by 25-50bps by March-end. The central bank will meet for its monetary policy review on December 7.
BofA-ML was more specific in its guestimates. The research agency said it expected a 25bps rate cut from the RBI on December 7 "as the conversion of black money into deposits should allow banks to cut lending rates even in the October - March busy industrial season."
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