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The five-year tenure of the Narendra Modi-led government may end with the lowest policy rate hike since 1991, according to a research report released by the State Bank of India (SBI).
The report comes two weeks after the RBI Governor-led Monetary Policy Committee raised the policy rate, popularly known as repo rate, by 25 basis points, or one-fourth of a percentage point. This was the first hike during the tenure of this government. The last hike was on January 28, 2014, before the 16th Lok Sabha elections (2014-2019).
According to the report, the maximum rate-cut of 500 bps was observed in 1999-2004, followed by a 425-bps cut in 2004-09.
However, during 2009-14, interest rates went up steeply (450 bps). The rupee’s movement, two months after the elections, shows that the exchange rate depreciated in all cases.
However, the impact of the elections on yield is not that straightforward. The yield increased in the two months after the elections during the UPA Government period, while it declined when the NDA came to power.
“It seems unlike countries like the US, rate-hike or rate-cut cycle in India is not entirely influenced by electoral cycles,” the report concluded.
The report also raises a question whether there will be further hikes by the RBI. It said that the June rate hike has found support across a cross-section of market clientele. Interestingly, even before the rate hike, it was vigorously argued that such a rate hike is warranted, given the jump in core inflation to establish credibility of an inflation-targeting central bank and also to support the rupee. However, on both these counts, data suggests otherwise, the report said.
It argued that the credibility of a central bank is not only supported by rate hikes, but also by inflation forecasts and frequent revisions. Similarly, the familiar textbook argument of rate-hikes as a tool to fight rupee depreciation is not supported by data, as episodes of rate-hike (as also rate-cut) in India show rupee depreciation after a rate hike (as of now).
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