The Reserve Bank of India (RBI) lowered the country's growth forecast for 2016-17 to 7.1 per cent from 7.6 per cent during its fifth bi-monthly monetary policy review on Wednesday.
"The outlook for GVA (gross value added) growth for 2016-17 has turned uncertain after the unexpected loss of momentum by 50 basis points in Q2 and the effects of the withdrawal of SBNs (specified bank notes) which are still playing out," the Monetary Policy Committee of the RBI said in its monetary policy statement.
The central bank said that the downside risks in the near term could come through two major channels -- short-run disruptions in economic activity in cash-intensive sectors and aggregate demand compression associated with adverse wealth effects.
"The impact of the first channel should, however, ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy," the statement said.
"While the impact of the second channel is likely to be limited. In October 2016, GVA growth in H2 was projected at 7.7 per cent and for the full year at 7.6 per cent."
"Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks."
The RBI also kept the key lending rates at 6.25 per cent during the last monetary policy review of the calendar year 2016.
With this, the repurchase rate, or the short-term lending rate charged by the central bank on borrowings by commercial banks, remains unchanged to 6.25 per cent. The reverse repurchase rate also automatically stands lowered to 5.75 per cent.
The central bank also said 19.1 billion currency notes were pumped into public domain and 12 lakh crore old notes have been deposited.
RBI also said that a decision to re-introduce Rs 1000 notes was yet to be taken.