Fitch Ratings has lowered India's GDP outlook for the current year to 6.9% from the 7.4% estimated earlier.
According to its Global Economic Outlook (GEO) report, released here on Tuesday, this was due to the cash crunch created in the economy following the demonetisation move.
"Economic activity will be hit in the fourth quarter of 2016 by the cash crunch created by withdrawal and replacement of bank notes that account for 86% of the value of currency in circulation," Fitch Ratings said in its latest GEO report.
"Fitch has revised its real GDP growth forecast down to 6.9% in the financial year ending March 2017 (FY17), from 7.4% in the September Global Economic Outlook," the report said.
The impact on GDP growth would increase the longer the disruption continues, it added.
Due to the demonetisation, Indian consumers have not had the cash needed to complete purchases, and there were reports of supply chains being disrupted and farmers unable to buy seeds and fertilisers for the sowing season, it said.
"Time spent queuing in banks is also likely to have affected general productivity," the report noted.
In October, Fitch had forecast 7.4% growth for the current fiscal for India. Fitch had also added that the growth would accelerate to eight per cent only by 2018-2019, on account of a lagged impact of monetary easing.
However, the rating agency said that in the medium-term the effect of the currency withdrawal on GDP growth was uncertain, but was unlikely to be large.
"Demonetisation is a one-off event. People who operate in the informal sector will still be able to use the new high-denomination bills and other options (such as gold) to store their wealth," it said.
The Reserve Bank of India's (RBI) policy rate cuts by a total 150bp since the beginning of 2015 are likely to feed through to higher GDP growth, even though monetary transmission has been impaired by relatively weak banking sector health, it added.
A surge in low-cost funding due to the demonetisation may remove a constraint on banks that prevented lending rates from keeping pace with the RBI's policy rate cuts in recent years, although this will depend on deposits remaining in banks beyond the next few months, the report added.
While there were many facets to India's demonetisation measure making it difficult to predict the impact on real gross domestic product (GDP) growth, it would still be higher than China's in the medium term, Fitch Ratings had said earlier.
"In China, we forecast real GDP growth of 6.4% in 2017, due to the impact of macro-prudential tightening measures targeting the housing market," it said.
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