Remonetisation happened at fast pace; V-shaped recovery soon: Patel

‘It is important that one grows a thick skin fast in this business and I think we have done that’

RBI GOVERNOR ON NOTE BAN IMPACT

RESERVE BANK Governor, Urjit Patel on Friday countered the widespread criticism of the handling of demonetisation saying that the central bank has grown a thick skin fast doing its job and that the economy will stage a 'sharp V' recovery as the negative impact of the currency withdrawal would be “for a short period of time”.

“The remonetisation has happened at a fast pace and that was part of the plan that subsequent to the withdrawal of the specified bank notes our production plans and supply processes would ensure that the remonetisation happened as quickly as possible, which given our capacity in terms of printing currency notes is at a high level,” Patel said in an interview to CNBC-TV18.

Responding to criticism against frequent policy changes and lack of proper communication from the RBI, Patel said: “I think that it is important that one grows a thick skin fast in this business and I think we have done that. We have gone about our work, we had undertaken major challenges during these past few months and valid criticism is something that we are open for and we take it in the spirit in which it is given and try to improve ourselves.”

When asked whether the principal objectives of the demonetisation exercise have been met, Patel said, “from the RBI side, the fake Indian currency note is an important issue that needed to be addressed. The other collateral benefits from this, in terms of greater accountability, better public finance, more transparency are by definition areas that take time to fully play out.”

Elaborating on remonetisation, Patel said, “we are proceeding at a pace that is very quick. Therefore we have managed to bring the situation to normal along most of the dimensions after demonetisation. In a way, this was part of the plan that we would be printing the currency notestofullcapacityfromdayone and we would reach a threshold point in this process when things do become more or less normal.”

Patel said, “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 and that is the role that the central bank plays. Very few countries grow at high rate, if inflation is high and volatile. I think, in a way, we are doing our bit to support a higher growth rate but on a durable basis.”

“With the constitution of the MPC, we have now diverse views on how the monetary policy is established every two months. I think that is a very important milestone in our economic history that the monetary policy is now determined through a committee process where there are both independent committee members and representation from the RBI,” Patel said.

Regarding the impact of US policy changes, Patel said: “I think it is a cause for concern for the world. I think it is a cause for concern for emerging markets and in terms of creating financial volatility. I do not think anyone will be safeguarded from it and we have to manage this as it plays out.”

He said there are some things that are under our control and that is to ensure that we ourselves follow sound macroeconomic stability rules. I think we are at a good place with respect to that. “We have had a Budget where the fiscal deficit has been reduced, we have a central bank which has a mandate for flexible inflation targeting, we have reserves which are at over $360 billion and we haveacurrentaccountdeficitthat continues to be modest. So, we need to look after these attributes of macroeconomic stability and that will allow us to withstand some of these sources of turbulence that come from the wider world,” he said.

On growth prospects, Patel said, “if you look at our projections that were published last week as part of the MPC, we expect growth to be about 7.4 per cent in the next fiscal year which isabout50basispointsmorethan the projection for the current fiscal year. Therefore there is a recovery compared to this fiscal year going into next year,” he said.

He said there are some good reasons behind that recovery. “One is that international trade, especially exports after a long time are now showing some life. We have had 5 months of positive export growth. Over time we will see that some of the capacities that had been installed in the past will come up for expansion. So, private investment demand is something that maybe in the second half of this year will give a fillip coming from that source also,” he said.

“So, our central estimate for next year is 7.4 per cent which I think is a highly respectable growth rate under the circumstances,” he said.

URJIT PATEL