Note ban to hit business growth

Mumbai: The government’s decision to demonetise higher denomination currency notes would put downward pressure on India’s growth in the short term that could further delay the recovery in investment cycle.

Given the downside risk to growth and lower inflation, domestic brokerage firm Kotak Securities said the brokerage expects the Reserve Bank of India to cut interest rate by 75-100 basis points.

Flagging off concerns regarding risk to domestic growth, analysts at Kotak Institutional Equities said the very near term disruption due to the cash crunch in retail trade and related activities would be a drag on the GDP growth.

“This will accentuate with likely slowdown in segments such as consumer durables and real estate activities. We note that real estate, retail trade, hotels and restaurants constitute 30 per cent of GDP,” it said.

According to Kotak, the GDP calculations incorporate private companies, which contribute 35 per cent of the overall sales.

In a predominantly cash economy this can lead to a significant slowdown in the SME segment, which will have a bearing on economic growth and investments.

There could also be a potential loss of pricing power in the discretionary products segment, which will be disinflationary.

The brokerage added that the surge in deposits and the consequent increase in the liquidity are expected to significantly boost the statutory liquidity ratio (SLR) demand for bonds.