Growth may fall 1 percentage pt: HSBC

Mumbai: HSBC has said in a report that over a year, economic growth can fall by 0.7-1.0 percentage point, with the maximum impact in the immediate two quarters, which will see a large contraction in ‘effective’ money supply due to demonetisation. The report also said that inflation would be around 20 basis points (bps, where 100bps = 1 percentage point) lower over a year due to fall in aggregate demand.
“In the short run, India’s drive to withdraw and replace high-denomination currency notes will bring some benefits, some losses,” said Pranjul Bhandari, chief economist, HSBC, India.According to the report, the government’s decision to abolish pre-existing stock of high-denomination currency will have a mixed impact on the macro economy over a year. “Long-term gains will be realised if this bold move is followed up by other reforms like incentivising digital adoption and tackling other centres for unaccounted money.” On the current account side, the impact of the move is expected to be mixed. “While we expect imports of consumer goods to fall, we find that this could be easily offset by higher gold demand. Our foreign exchange strategists see the rupee weakening versus the dollar to 68.0 by end-2016 and 69.5 by end-2017. All told, the short run is indeed a mixed bag. Longer-term gains depend on follow-up reforms.” said Bhandari.