New Delhi: Is there any impact of the reduction in interest rates by the Reserve Bank of India (RBI) on the Lok Sabha election if it is held that year? Yes, history suggests a rate cut favours the government of the day. Whenever the RBI has cut interest rates in a year of a general poll, the party in power at the time won the election.
In the first monetary policy review of this financial year on Thursday, the RBI cut the repo rate by 25 basis points. This has come as a great relief for the middle class because, on the one hand, their equated monthly instalments of loan repayments for houses, vehicles and other commodities will turn easier. On the other, the industry can avail of loans on easier terms too.
In the year 2019, the RBI cut interest rates twice. Prior to the Lok Sabha election, it was the first review meeting of the financial year 2019-20. There was no change in the lending rate until the election.
Repo rate or Repossession rate is a benchmark interest rate at which money is lent by Reserve Bank of India to all the commercial (retail) banks in India as a short term loan. It is also known as the policy rate or discount rate. Reserve Bank of India repurchases government securities from all the commercial banks at this discount rate.
This deduction now is also a big relief for the Modi government. A decision of the RBI does not fall under the ambit of the Election Commission’s (EC) model code of conduct. So, the RBI Monetary Policy Review Committee (MPC) was comfortable taking a decision like this.
That does not mean that a friendly RBI deliberately helped the BJP. The central bank reviews its monetary policy six times in a financial year: in April, June, August, October, December and February. However, the April review is eagerly awaited because this sets the mood of the economy for the whole fiscal year.
The people, however, do not benefit a lot by small cuts in the interest rates, as the retail bank is reluctant to pass on the benefit to its customers. But there is a pattern seen in the results of the last three Lok Sabha elections.
No rate cut before 2014 election
In the year 2014, the Lok Sabha election took place from 7 April to 12 May. The result came out on 16 May. The RBI’s first monetary policy review that year was on 1 April.
Reverse Repo rate is the interest rate at which Reserve Bank of India borrows money from the commercial banks by lending securities. This rate is a short term borrowing rate for RBI. If the Reserve Bank of India requires to raise money, it approaches commercial banks for borrowing from them at a lucrative Reverse Repo Rate. In this way, RBI creates an opportunity for financial institutions and commercial banks to generate profit with a short term investment.
Then RBI governor Raghuram Rajan had adopted a strict attitude in tackling inflation, which was anyway not quite under control of the Manmohan Singh government. Rajan kept the repo rate at 8%, which was much higher than today’s 6%.
The RBI did not make any change in the cash reserve ratio (CRR) either. That year, the Congress-led UPA government lost the election horribly. Under the leadership of Narendra Modi, a new government was formed.
What happened in 2009?
In the year 2009, the Lok Sabha election took place between 16 April and 13 May. The first review of monetary policy was announced by the RBI that year on 21 April. The then governor of the central bank, D Subbarao, cut the repo rate by 4%, bringing it down from 5% to 4.75%.
The reverse repo rate was cut too: from 4% to 3.25%. In the Lok Sabha election held that year, the UPA came back to power comfortably.
In 2004, the Lok Sabha election took place between 20 April and 10 May. The RBI did the first monetary policy review on 10 May that year. The then governor YV Reddy did not change the repo rate and kept it at 4.5%.
The bank rate was kept constant at 6%. The Atal Bihari Vajpayee government had to face defeat in that election. The Congress became the largest political party that led the first UPA government.