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War on black money will bring down inflation, expect a rate cut: Experts

Inflation in the coming months will come down significantly with the Narendra Modi government clamping down on the circulation of black money. This will not only give the much needed relief to the common man as expectations for a lower interest rate regime is set.

business Updated: Nov 10, 2016 08:34 IST
Mahua Venkatesh
The war on inflation is likely to bring down inflation and set the stage for a rate cut by RBI, say experts.
The war on inflation is likely to bring down inflation and set the stage for a rate cut by RBI, say experts.(AFP)

Inflation in the coming months will come down significantly with the Narendra Modi government clamping down on the circulation of black money. This will not only give the much needed relief to the common man as expectations for a lower interest rate regime is set. The country’s policy makers said that sucking out of old currency notes of Rs 500 and Rs 1000 denominations besides banning their use from November will “cool prices” giving the Reserve Bank of India enough room for a rate cut in the next monetary policy meet.

“The move is good for inflation.This will be a strain on money liquidity but eventually things will ease out,” said a top finance ministry official.

“The decline in currency circulation will have a positive impact on the inflation numbers in the medium term and we can expect a cut in rates,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India told Hindustan Times.

The move will ensure that prices of real estate comes down.

“With larger circulation cash in the system, the value of the rupee was falling and naturally we saw inflation..The decision to introduce new currency notes and completely withdraw the Rs 500 and Rs 1000 notes will lead to eliminate the black component completely and this will make the rupee stronger,” said a senior executive at Bank of Baroda.

Prime Minister Narendra Modi on Tuesday night took the country by surprise as he announced withdrawal of all currency notes of Rs 500 and Rs 1000 denominations.

“There will be hardship in the transitory phase, but this will eventually ease out black money and corruption in the economy. This will also lead to surge in tax collections as paying taxes will be the only way to legitimise the cash of 500 or 1000 now onwards,” Girish Vanvari, Partner and Head, Tax, KPMG India said.