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Benefits of demonetisation will take time to reflect in Indian economy, says RBI chief Urjit Patel

The impact of the currency ban will be ‘a sharp V’, but the country is in a ‘good place’ in terms of financial stability, he said in an interview to CNBC-TV18.

Reserve Bank of India Governor Urjit Patel on Friday said that the Indian economy will suffer a slowdown after the demonetisation drive but will recover from it, too. “Almost everyone agrees that the impact is going to be a sharp ‘V’, that we would have a downgrade of growth for a short period of time. However remonetisation has happened at a fast pace and that was part of the plan,” he told CNBC-TV18.

The central bank chief said it will take a while for the benefits of the currency ban to reflect in the country, adding that a lot more work was required to ensure that they last. “Our central estimate for next year is 7.4%, which I think is a highly respectable growth rate under the circumstances,” he said.

With regard to the central banking keeping its key rates unchanged, Patel explained that switching the RBI’s policy stance to “neutral” from “accommodative” allowed for more flexibility to slash, hike or hold the rates. “The best way that a central bank can support growth on a durable basis is to ensure that the inflation is low, stable, there is financial stability,” Patel told the TV channel.

In the televised interview, the RBI governor also said that India was in a “good place” in terms of financial stability, and that the central bank will tackle any sharp uncertainties in the markets that emerge from global developments, including concerns over the Donald Trump administration’s policies and a United States Federal Reserve rate hike.

“We have had a budget where the fiscal deficit has been reduced, a central bank that has a mandate for flexible inflation targeting, reserves that are over $360 billion and a current account deficit that continues to be modest,” Patel said. “We need to look after these attributes of macroeconomic stability, which will allow us to withstand these sources of turbulence that come from the wider world.”

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