How Budget 2025 could impact RBI's rate cut decision
What's the story
As the Union Budget 2025 nears, market experts believe that growth-oriented steps from Finance Minister Nirmala Sitharaman could pave the way for a rate cut by the Reserve Bank of India (RBI).
The cut, between 25 to 50 basis points (bps), is expected to take place during RBI's February meeting.
The speculation has been driven by RBI's recent liquidity-boosting measures.
Rate expectations
RBI's liquidity measures spark rate cut predictions
Independent market analyst Ambareesh Baliga has said that a bigger rate cut of 50 bps in February wouldn't be surprising, considering the RBI's recent liquidity measures.
These comprise a mix of foreign exchange and money market measures aimed at injecting ₹1.5 lakh crore into the system.
This comes as a response to demands for improved liquidity support.
Fiscal balance
Balancing economic stimulation and deficit reduction
Piyush Mehta, CIO & Partner at Caprize Investment Managers, has stressed the Finance Minister needs to spur growth while cutting the deficit.
He said, "With lower spending last year, this year's emphasis on capital expenditure over revenue spending is crucial."
Mehta anticipates a 25 bps cut in February and 75 bps throughout the year.
Rate influencers
Budget's influence on RBI's interest rate decisions
Deepak Jasani, a market expert, has identified three key factors in the Union Budget 2025 that will influence the RBI's interest rate decisions.
These are India's GDP growth forecast for FY26, the fiscal deficit target, and government borrowing plans.
He noted that higher borrowing could increase rates while stricter fiscal management could lower them.
Fiscal outlook
Government's market borrowing and growth projections
According to a Moneycontrol poll, the government is expected to announce market borrowing of ₹14-15 lakh crore for FY26, against a target of ₹14.01 lakh crore for FY25.
The government's first advance estimates released in January pegged nominal GDP growth at 9.7%.
However, analysts at Antique are forecasting an 11% growth rate for FY26, reflecting optimism about an economic recovery.
Budget expectations
Fiscal consolidation and potential tax reforms
On the fiscal front, Antique has projected the fiscal deficit for FY26 to narrow to 4.5% of GDP, from 4.9% in FY25.
This disciplined approach is crucial for maintaining investor confidence while ensuring enough resources for growth initiatives.
The Union Budget 2025 is also expected to address middle-class concerns with possible tax reforms and incentives that could lead to more savings and bank deposits, aiding RBI's efforts to further lower interest rates.