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RBI governor Urjit Patel says demonetisation effects ‘transitory’

LiveMint logoLiveMint 25-04-2017 Anirban Nag

Mumbai/New York: Reserve Bank of India (RBI) governor Urjit Patel said demonetisation imposed in 2016 probably had no more than a temporary effect on Asia’s third-largest economy, as lending continued to flow.

The “accumulating evidence points to” the effects of demonetisation as “transitory,” governor Urjit Patel, who took over from Raghuram Rajan in September, told an audience Monday at Columbia University in New York. “Credit is more important than currency, and credit was not affected at all.”

Authorities have been seeking to rein in liquidity after the government’s November recall of high-denomination currency notes flooded the banking system with cash. The excess funds not only threaten to stoke inflation, but have also constrained the RBI’s ability to intervene at a time when the rupee is rallying.

Households’ inflation expectations “continue to be adaptive and therefore difficult to bring down in a durable manner,” said Patel, who rarely appears in public.

In a bid to burnish the Reserve Bank of India’s credentials as an inflation-fighting central bank, Patel has called for “close vigilance” on inflation. Consumer prices rose 3.81% in March from a year earlier, having risen 3.65% in February. India’s central bank targets keeping inflation around 4 percent in the medium term.

Earlier this month, India unexpectedly raised the reverse repo rate while keeping the benchmark unchanged, effectively tightening policy to step up the fight against inflation.

Speaking about the world economy, Patel said Monday that the data point to a broad-based upswing in global growth, though risks remain, such as protectionism and geopolitics.

There is international push-back against trade talk emanating from the US, Patel said, defending the benefits of an open trading system. Companies’ share prices reflect benefits from global supply chains, and “if policies come in the way of that, then the main wealth creators in a country that advocates protectionism” are going to be affected, he said. Bloomberg

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