India's cash crunch seen biting into economic growth

Bengaluru: India's economy lost momentum in the final three months of 2016 after Prime Minister Narendra Modi's ban on high-value notes hurt consumption and businesses but it is set to pick up this quarter, a Reuters poll found.

Having posted growth of above 7 percent for six consecutive quarters, India's gross domestic product is expected to have expanded just 6.5 percent in the October-December quarter - the weakest in nearly three years.

The poll also suggested growth would remain below 7 percent in the first quarter of 2017, at 6.9 percent.

India's GDP for the fiscal year to March 2017 is expected to grow 6.9 percent, according to the poll of over 20 economists. That is higher than the International Monetary Fund's estimate of 6.6 percent.

"If the demonetisation exercise has led to some permanent supply-side disruptions, growth could be weaker for longer," wrote Pranjul Bhandari, chief economist for India at HSBC, in a note.

The Nov. 8 announcement of the ban on high-value notes, which coincided with Donald Trump's US. Presidential election victory, has caused major disruptions in the cash-reliant economy.

Industrial and services output have been hobbled, with a survey earlier this month showing private sector activity contracted in December.

"Lower growth for at least two quarters means that the output gap will take longer to close, suggesting that the revival of the investment cycle, which is already very weak, could be pushed out even further," added Bhandari.

Still, a majority of economists answering a separate question said they were confident or somewhat confident the government's demonetisation drive would boost consumption and investment in the longer-term.

A slight majority, nine of 15 economists, said the initial aim of removing unaccounted money from the system will not be achieved. Eight of the 13 forecasters said the social cost to the poor and small businesses from the currency ban will be eclipsed by underlying benefits in the long-term.

In a surprise move, the Reserve Bank of India chose not to cut its repo rate in December to combat the fallout from the demonetisation, keeping it steady at 6.25 percent.

Inflation hit a two-year low in December, with consumer prices rising 3.41 percent, well below the RBI's near-term target of 5 percent by March 2017.

It is expected to hover between 4.1 and 5.2 percent from now to mid-2018, giving the RBI room to make further rate cuts.

But analysts expect the central bank to make only one rate cut over the poll horizon, tipping a 25 basis point cut at its upcoming Feb. 8 meeting, a week after the government presents the federal budget for the 2017/18 financial year.