MUMBAI: The Budget has created space for RBI to cut interest rates by maintaining fiscal consolidation and lowering govt borrowing. Measures to reduce tax deduction at source could also boost bank deposits, making rate transmission easier.
RBI governor Sanjay Malhotra will chair his first monetary policy committee (MPC) meeting this week. It will also be the first MPC meet for deputy governor M Rajeshwar Rao, who took over the monetary policy portfolio after Michael Patra retired last month. Many see Malhotra holding a different view from his predecessor and feel the recent depreciation of the rupee as a sign that the regulator is allowing the currency to settle lower in line with other markets.
According to Aurodeep Nandi, India economist at Nomura, the Budget should provide greater room for RBI to begin lowering its policy rate at the Feb MPC meeting. “The fiscal wizardry of the numbers has been the ability to cut fiscal deficit from 4.8% of GDP in FY25 to 4.4% in FY26, while announcing income tax concessions and maintaining a decent public investment outlay. Much of this has been possible due to a bonanza of RBI dividends and expectations of healthy income tax collections,” he said.
Rahul Bajoria, economist at Bank of America Securities, said, “After a period of tackling conflicting objectives, RBI is finally seeing some cohesion in economic data around growth and inflation, providing a base for policy easing. The adjustment in exchange rate also signals a shift in policy approach under new governor. We expect RBI to cut repo rate by 25 basis points to 6.25% in Feb MPC.” According to Bank of Baroda MD & CEO Devdutt Chand, the liquidity situation has changed significantly from a month ago.