The budget for the financial year 2025-26 has been announced, drawing attention to the Reserve Bank of India (RBI) and its upcoming Monetary Policy Committee (MPC) meeting scheduled from February 5 to 7.
With a strong emphasis in the budget on boosting consumption to drive economic growth, it is widely anticipated that the RBI may align with this vision by reducing interest rates.
Lower interest rates are expected to encourage consumer spending, ultimately accelerating the nation’s economic growth.
Income Tax Relief and Consumption Boost
A key highlight of the budget is the significant income tax relief introduced by Finance Minister Nirmala Sitharaman.
The tax-free income limit under the new regime has been increased from ₹7 lakh to ₹12 lakh annually.
This change is expected to positively impact consumption patterns, particularly among middle and upper-middle-income groups.
Pradeep Gupta, co-founder and vice-chairman of Anand Rathi Group, believes that this will lead to an increase in discretionary spending, further stimulating economic activity.
Potential Policy Changes by RBI
The government also stands to benefit from higher dividends from the RBI and public sector banks, with an estimated total dividend of ₹2.56 lakh crore for the financial year 2025-26, compared to ₹2.30 lakh crore in the previous year.
Factors such as the rupee’s depreciation and foreign currency earnings are expected to contribute to this increase.
With inflation projected to remain around 4%, the conditions appear favorable for interest rate cuts.
Economic experts, including Kunal Kundu of Societe Generale, predict that the newly appointed RBI Governor, Sanjay Malhotra, may adopt a more supportive stance for economic growth.
This could include reducing policy rates, contrasting with the cautious approach of the previous governor.
Economists like Rahul Bajoria from Bank of America Securities and Garima Kapoor from Elara Securities suggest that the RBI may lower the repo rate by 0.25% in February, bringing it down to 6.25%.
Gradual reductions could follow throughout the year, with the repo rate potentially reaching 5.50% by the end of 2025.
Additionally, the RBI might inject more liquidity into the banking system by reducing the Cash Reserve Ratio (CRR) or purchasing bonds in the open market.
