According to the Reserve Bank of India (RBI), about 12.4 trillion rupees ($183 billion) worth of demonetized notes were returned as of Dec. 10, 2016, and 4.61 trillion rupees worth of notes had returned into circulation.
On Nov. 8, Prime Minister Narendra Modi announced all 500 and 1,000 rupee banknotes, about 86 percent of total value of currency in circulation, would be withdrawn and replaced by new 500 and 2,000 rupee notes.
India's massive cash-dependent informal sector will likely bear the brunt of the cash crunch, according to the report, and the pressure could be compounded further by the planned roll-out of the goods and services tax (GST) in 2017.
Broadly, S&P expects the disruption to affect private consumption demand, which accounts for 55 percent of India's gross domestic product (GDP).
The drop in consumption is set to dampen economic growth in the second half of the current fiscal year ending March, 2017; the ratings agency lowered its growth forecast to 6.9 percent for the full fiscal year, from an earlier estimate of 7.9 percent. Prices are expected to fall marginally in the short-term and a delay in private sector investment is also expected.
"We expect lower private consumption in fiscal 2017, but expect demand to revive and growth to rebound in fiscal 2018," said Dharmakirti Joshi, chief economist at S&P's India subsidiary Crisil.
"India should shortly revert back to an 8 percent annual growth trajectory."
The ratings agency does not expect any significant, near-term impact on the credit profiles of India's rated entities, but highlighted the factors to watch: