Budget done. Over to RBI now. | Stock Market News

Mumbai: After finance minister Nirmala Sitharaman delivered a consumption-supporting budget, the ball is now in the Reserve Bank of India’s (RBI) court to deliver the last-mile push to growth with a rate cut next week.

A majority of economists believe that the budget has set the stage for a rate cut by keeping fiscal deficit under control.

“The budget does not add to any pressure to push up inflation. It is only expected to push up demand to meet the already excess capacity in the consumer good space,” said Madan Sabnavis, chief economist, Bank of Baroda.

The government on Saturday announced income tax relief by exempting individuals earning up to ₹12 lakh annually from paying income tax. The increase in the standard deduction is expected to strengthen their spending power and also fuel demand for consumer goods, automobiles, and housing.

Separately, the government has also revised the fiscal deficit target for the current fiscal to 4.8% from 4.9% earlier. The FY26 fiscal deficit is now projected at 4.4%, in line with the fiscal consolidation plan of bringing down the deficit to 4.5% of the GDP by next year.

However, a few economists now expect RBI to do the heavy lifting in terms of delivering a rate cut as the burden of supporting growth has now shifted to the central bank. While the budget puts money in the hands of the public, the growth in revenue and capital expenditure has remained tepid.

Rate cut expectations rise

Economists expect RBI to cut the repo rate by 25 basis points on 7 February when the Monetary Policy Committee completes its review. It would be the first rate cut in more than four years.

“It might look like prima facie the government is doing tax cuts, but this budget may not generate a very strong multiplier impact on growth, given the deficit consolidation,” said an economist on condition of anonymity.

According to HSBC, “The 0.4% of GDP fiscal consolidation in FY26 is likely to impart a negative fiscal impulse on the economy. However, the task of lifting growth is likely to pass on to the RBI. With inflation falling, room for rate cuts and easier liquidity has opened up. We expect a 25bp rate cut in the Feb 7 meeting, followed by another one in April, taking the repo rate to 6%.”

Over the last few days, RBI has injected massive liquidity into the banking system through various tools like open market operation (OMO), variable repo rate (VRR) and dollar-rupee sell swap, setting the stage for a rate cut next week.

However, a few economists believe that the inflationary pressures are still high for the MPC to allow any rate cut next week. Retail inflation rate, measured by the Consumer Price Index (CPI), for December stood at 5.22%, above the medium target of 4%. 

The Indian Meteorological Department (IMD) on Friday also projected temperatures in north India to be warmer than normal in February along with below-normal rainfall. This is likely to harm the standing wheat crop as well as fruits and vegetables. Along with depreciating currency and tight liquidity, these economists believe RBI is faced with difficult choices in the coming policy.

“While both central and state budgets inclining towards provision of consumption support via tax cuts and cash handouts respectively, the MPC ought to be reasonably convinced about alignment of inflation with the target, a goal that is yet to be achieved in the post-pandemic period. With signs of persistence of above normal temperatures and exchange rate risks still unsettled, we continue to expect the MPC to maintain status quo in its upcoming policy review in Feb-24. However, liquidity easing steps could continue to be taken in a calibrated manner to ensure neutral policy stance prevails in practice,” said Vivek Kumar, economist, QuantEco Research.

The Economic Survey expects food inflation to cool in the fourth quarter ending March, driven by seasonal easing of vegetable prices and kharif harvest arrival, along with good rabi production. RBI sees FY25 inflation at 4.8%.