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Speculation on RBI Rate Cut and Economic Growth Prospects in Union Budget 2025-26
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Last Updated: 30th January 2025 - 06:13 pm
Market analysts suggest that if the Finance Minister unveils growth-driven initiatives while adhering to fiscal discipline, the conditions could be favorable for a rate cut of 25-50 basis points in the RBI’s February policy meeting.
With the Union Budget 2025-26 just around the corner, the Reserve Bank of India (RBI) has introduced fresh liquidity measures, further intensifying speculation about a possible rate cut in the coming week.
Independent market expert Ambareesh Baliga stated that, given the RBI’s recent liquidity infusion, a 50 bps rate cut in February wouldn’t be surprising. The central bank's latest moves, involving a combination of foreign exchange and money market interventions, aim to inject approximately ₹1.5 lakh crore into the financial system to address liquidity concerns.
In a similar vein, Piyush Mehta, CIO & Partner at Caprize Investment Managers, noted that although the Finance Minister has limited room for maneuver, the emphasis should be on stimulating economic activity while managing the fiscal deficit. "Last year saw lower government spending, making this year’s focus on capital expenditure over revenue spending crucial," Mehta explained. He anticipates a 25 bps rate cut in February, with a cumulative reduction of 75 bps over the year.
Budget’s Role in Shaping RBI’s Policy
Experts argue that for the RBI’s dovish stance to align with fiscal policy, the Budget must strike a balance between fostering economic growth and maintaining financial discipline.
Market analyst Deepak Jasani highlighted three key aspects of the Budget that the RBI will closely monitor: GDP growth projections for FY26, the fiscal deficit target, and the government’s borrowing strategy. These elements will directly influence interest rate decisions—higher borrowing could drive rates up, whereas stricter fiscal management could create room for a rate cut. Analysts currently predict a 25 bps rate cut in February, with a total reduction of 75-100 bps over the year.
A Moneycontrol poll suggests that the government may announce market borrowings of ₹14-15 lakh crore for FY26, compared to the ₹14.01 lakh crore target set for FY25. Additionally, growth projections remain in focus.
While the government’s first advance estimates in January placed nominal GDP growth at 9.7%, analysts at Antique foresee an 11% growth rate for FY26, signaling optimism regarding economic recovery.
Fiscal Consolidation & Middle-Class Benefits
Fiscal discipline will be a crucial factor in maintaining investor confidence while ensuring sufficient resources for economic growth. Antique projects that the fiscal deficit could shrink to 4.5% of GDP in FY26, down from 4.9% in FY25.
Beyond economic expansion and fiscal prudence, the Union Budget is also expected to address middle-class concerns, with potential tax reforms and incentives on the horizon.
Analysts at Antique suggest that modifications in tax slabs or increased deductions under the new tax regime could encourage higher savings and bank deposits. This, in turn, would provide banks with more liquidity, allowing the RBI greater flexibility to lower interest rates without straining liquidity conditions. Increased savings and deposits would ultimately support the RBI’s efforts to ease monetary policy while ensuring economic stability.
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