India:RBI plays cautious

Internal assessment: While RBI has cut its growth estimate for FY17 by 50bps, we think the central bank is underestimating the potential adverse impact on the real economy likely on account of demonetization. We note that even before demonetization, growth momentum was weak, as was amply evident from the July-Sep’16 national accounts data. Indeed, investment was down 5.6%yoy in July-Sep’16, which marked the third straight quarter of sharp contraction. Output gap, which was estimated to be about 1% negative prior to demonetization, is likely to widen further.