The budget for the financial year 2025-26 has been announced, and the spotlight is now on the Reserve Bank of India (RBI). Its Monetary Policy Committee (MPC) will meet from February 5 to 7.
Since the budget emphasized boosting consumption to drive economic growth, it is anticipated that the RBI might support this effort by reducing interest rates.
Lower interest rates are expected to encourage spending and further accelerate the country’s economic growth.
The budget also brought significant relief in income tax. Finance Minister Nirmala Sitharaman has increased the tax-free income limit from ₹7 lakh to ₹12 lakh annually under the new regime.
Pradeep Gupta, co-founder and vice-chairman of Anand Rathi Group, stated that this change could boost consumption, especially among middle and upper-middle-income groups, by encouraging discretionary spending.
RBI’s Role: Potential Interest Rate Reductions
The government is also set to benefit from higher dividends from the RBI and public sector banks.
Economic experts estimate a total dividend of ₹2.56 lakh crore for the financial year 2025-26, compared to ₹2.30 lakh crore received last year. Factors like the rupee’s depreciation and foreign currency earnings are likely to contribute to this increase.
Inflation is expected to remain around 4%, which creates room for interest rate cuts. Experts like Kunal Kundu from Societe Generale believe that the new RBI Governor, Sanjay Malhotra, is focused on supporting the economy
and is likely to reduce policy rates if required. This shift in approach contrasts with the previous governor’s cautious stance on inflation.
Economists, including Rahul Bajoria from Bank of America Securities and Garima Kapoor from Elara Securities, predict that the RBI might lower the repo rate by 0.25% in February, bringing it down to 6.25%.
Over the course of the year, the repo rate could be reduced further in phases by 0.75%, reaching 5.50% by the end of 2025. A
dditionally, the RBI may inject more cash into the banking system by reducing the Cash Reserve Ratio (CRR) or purchasing bonds in the open market.
