Bengaluru : Indian inflation is expected to have cooled to a 14-month low in November after Prime Minister Narendra Modi’s surprise removal of high denomination bank notes caused an intense cash shortage and severely hurt consumption, a Reuters poll found.

Modi’s announcement on 8 November that he was withdrawing Rs500 and Rs1,000 bank notes in an attempt to curb corruption and tax evasion made it much harder for consumers to make purchases in the predominantly cash-based economy.

Consumer spending makes up 55% of India’s economy and most people buy and get paid in cash. The virtual overnight removal of 86% of the currency in circulation has left companies, farmers and households suffering. Inflation is expected to ease to 3.90% in November from a year earlier, according to the median consensus from the Reuters poll of over 20 economists.That would compare with October’s 4.20% and the Reserve Bank of India’s target of 4 % to be reached by 2021.

“Overall, I think there is a 10 to 20 basis point impact on inflation due to demonetisation. We have downgraded our forecast to the same degree," said Tushar Arora, senior economist at HDFC Bank.

Indian services activity dived into contraction last month due to a sharp decline in demand following the withdrawal of the high denomination bank notes, with factory activity showing a sharp deceleration as well.

Despite the turmoil following the cash clampdown, India’s central bank surprised markets by eschewing a rate cut and leaving its key policy rate unchanged at 6.25% this week, choosing to wait for more information before judging the full effects of the demonetisation.

Before last month’s announcement, the recently formed monetary policy committee chaired by Reserve Bank of India governor Urjit Patel was expected to cut interest rates in early 2017.

With the central bank passing up the opportunity to make a rate cut in December, despite cooling inflation, a February move could be on the menu. Wholesale price inflation likely cooled to 3.10% in November from 3.39% in October, the poll found.

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