IMF lowers Indias FY16-17 economic growth forecast, citing government's demonetisation

The International Monetary Fund (IMF) in its latest report named ‘World Economic Outlook’ lowered India’s economic growth outlook for fiscal year 2016-17 by by one percentage point and 0.4 percentage point, respectively, due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative.

The IMF mentioned that the India to grow at 6.6 percent for the current year, and 7.2 percent next year. This comes after the IMF had projected 7.6 percent growth this year and next year in its previous report.

Interestingly, the IMF near-term growth prospects were revised up for China, due to expected policy stimulus, but were revised down for a number of other large economies-most notably India, Brazil, and Mexico.

In emerging market economies, financial conditions were heterogeneous but generally tightened, with higher long-term interest rates on local-currency bonds, especially in emerging Europe and Latin America.

Policy rate changes since August also reflected this heterogeneity—with rate hikes in Mexico and Turkey and cuts in Brazil, India, and Russia—as did changes in EMBI (Emerging Market Bond Index) spreads.

Lastly, the country’s inflation is anticipated to have eased further in coming months due to the adoption of demonetization, exerting deeper pressure on the Reserve Bank of India (RBI) to undertake easing policy in the next 2-day bi-monthly monetary policy scheduled to be held on February 7.