A new research report co-authored by IMF chief economist Gita Gopinath claims that the demonetisation exercise generated a decline in national economic activity of roughly 2 percentage points in the fourth quarter of 2016 and was equivalent to a 200 basis point interest rate hike.
The Reserve Bank of India has since February 2019 delivered a 135 basis point rate cut in order to revive economic activity which fell to over a six-year low at 5 per cent during the April-June quarter.
“The magnitude of the peak effect on output is comparable to a roughly 200 basis point tightening of the monetary policy rate based on the median of estimates reviewed in Ramey (2016) of econometric studies of US data,” the research report said.
The Modi government’s key argument to justify demonetisation was to reduce the use of cash which makes financial transaction an expensive affair but the research report concluded that in modern India cash continues to serve an essential role in facilitating economic activity.
