Terming demonetization as a credit positive for India in the medium term, global ratings agency Moody's Investors Service in its report, on Indian credit, has said that it will strengthen countries institutional framework by reducing tax avoidance and corruption. The report added that it should also result in efficiency gains through greater formalization of economic and financial activity, which would help broaden the tax base and expand usage of the financial system. However, Moody’s estimates growth to slow down to 6.4% in the January-March quarter, from 7% in the previous three months.
The rating agency, in its report ‘Economic Slowdown from Demonetization Wanes; Credit Implications Unfolding’, has said that the country remains resilient to economic disruption and the worst of the liquidity crunch has passed, which should support a rebound in consumption and investment. It also said that if most of the old notes are deposited into the banking system, legitimising previously undeclared incomes and wealth, the benefits to the government related to higher future tax collection will accrue from measures aimed at leveraging the information obtained when notes were deposited. It added that looking ahead it expects remonetisation to continue at a similar pace.
For the banking sector, the report stated that demonetisation has hit bank's asset quality and demand for credit. It said that this trend is likely to continue over the next few months and expect asset quality to deteriorate in the current quarter. But it has said that Indian banks have sufficient buffers to withstand the impact. It added that more positively, banks have experienced significant deposit inflows as a result of demonetization. They also expect bank deposits to increase by only around 1-2 percent, compared to before demonetization, with cash remaining the dominant means of retail transactions.