RBI Monetary Policy: In April this year, the central bank asked all of us to brace for a summer of rate hikes — two months later, in June, it did its first act of monetary tightening of 25 basis points for the first time in the Narendra Modi-era. The watchers were mostly expecting for an August hike.
The surprise apart, they continue to expect so, and even more in succeeding months. A Reuters poll of 58 economists showed that they expect two more rate hikes — 25 basis points each — by the end of this fiscal year 2018-19, while there’s no expectation of rate cut anymore. So far, the rate cut in the Narendra Modi-era has been 200 basis points.
If the Reserve Bank of India (RBI) does not surprise this fiscal year anymore, and it happens the way it is expected, the Narendra Modi government will witness a total rate hike of 75 basis points, making the net rate cut of 125 basis points. This will incidentally match the total rate cut during UPA-I era in 2004-2009. If the total rate hike is lower than 75 basis points, the NDA-II will have a bigger rate cut than UPA-II but still far lower than NDA-I.
The NDA-I government of Atal Bihari Vajpayee witnessed net RBI policy rate cut of a whopping 400 basis points over its five-year term during 1999-2004, a record high since 1991. The Atal Bihari Vajpayee government witnessed a rate hike of 100 basis points and a rate cut of 500 basis points.
RBI policy rates under governments with full five-year tenure:
|Government||Rate Hike||Rate Cut||Net Effect|
|2014-2019||NDA-II (so far)||25||200||-175|
Data: SBI Research (Note: Data for NDA II until June 2018)
The RBI voted unanimously to hike the repo rate but kept the stance ‘neutral’, which means that future rate hike, cuts or holds will depend on upcoming data. Right now, crude oil prices and US Fed’s tightening cycle are being closely watched by the central bank.
The impact of Housing Rent Allowance (HRA) under the Seventh Pay Commission and raising of the farmers’ minimum support price (MSP) could also play an important role in RBI’s decision. Nomura’s principal economist Sonal Verma said that the RBI may go for one more rate hike at the next policy review in August but will not veer away from the “neutral” stance of the policy.