Winning Bizness Desk

Mumbai The Union Budget for the financial year 2025-26 has been presented, and now all eyes are on the Reserve Bank of India (RBI). The RBI’s Monetary Policy Committee (MPC) meeting will take place between February 5-7. Given that the focus of the budget was on boosting domestic consumption, there is growing speculation that the RBI might reduce interest rates to support the government’s efforts. Increasing consumption is deemed essential to accelerate economic growth in the country.

In the budget, significant relief was provided in income tax. Finance Minister Nirmala Sitharaman announced that income up to ₹12 lakh annually would be tax-free, a sharp increase from the previous exemption limit of ₹7 lakh. Pradeep Gupta, Co-founder and Vice Chairman of Anand Rathi Group, stated that this tax relief is expected to increase consumption, especially among the middle and upper-middle-income groups, which could lead to higher discretionary spending.

Government Expects ₹2.5 Lakh Crore Dividend from RBI and Banks

Economic analysts have estimated that the government could receive around ₹2.56 lakh crore in dividend from the Reserve Bank of India (RBI) and public sector banks in the current financial year. In the previous year, the government had received ₹2.30 lakh crore from these institutions. The anticipated increase in dividend this year is attributed to the decline in the value of the rupee and profits earned from foreign currency assets.

Inflation Could Drop to 4%, Raising Chances of Rate Cuts

Economist Rahul Bajoria from Bank of America Securities (BofA Securities) and Garima Kapoor from Elara Securities believe that inflation is expected to fall to around 4% this year. As a result, experts are hopeful that the RBI will face no difficulties in cutting interest rates further. According to Kunal Kundu, the economist at Société Générale, the new RBI Governor, Sanjay Malhotra, is more inclined towards supporting the economy rather than being overly cautious about inflation, unlike his predecessor, Shaktikanta Das. If necessary, Governor Malhotra will not hesitate to reduce the repo rate.

Experts Expect a 1% Cut in Repo Rate by the End of 2025

If the RBI does reduce interest rates, it could significantly ease the EMI burden for consumers, leading to more savings. Bajoria and Kapoor are predicting that the RBI will cut the repo rate by 0.25% in February, bringing it down to 6.25%. Subsequently, they expect a phased reduction of 0.75% more, with the repo rate potentially falling to 5.50% by the end of 2025. Additionally, the RBI could boost liquidity in the banking system by reducing the Cash Reserve Ratio (CRR) by 0.50% or through open market bond purchases.