The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) on the 7th of February cut its policy interest rate by a 25-basis point, marking the first reduction in nearly five years.
The ground for this rate cut was laid in the Budget for 2025-26 which was presented on February 1. In the Budget, the central government took a slew of measures to lower the fiscal deficit further, delivering a non-inflationary Budget.
After the rate cut by the RBI, Finance Minister Nirmala Sitharaman acknowledged that the government’s fiscal policy and the RBI’s monetary policy are working in coordination to boost economic growth and private investment.
Besides promoting growth and private investment, the other key goal of the Budget is to boost consumption demand. To this effect, the government sharply raised the income tax exemption limit to Rs 12 lakh from Rs 7 lakh in the new tax regime, which it said would leave around Rs 1 lakh crore cash in the hands of taxpayers. Along with this surplus in the hands of people, a lower interest rate regime would goad people to buy consumer goods, which in turn would lead to capacity expansion in the private sector and employment generation.
Analysts expect headline inflation around 4.5 per cent on year in the first half of 2024-25 on the back of easing food inflation, which should allow the RBI to follow up on the February 7 rate cut with an additional 25 bps to 50 bps policy repo rate cut, with risks skewed towards a slightly deeper easing cycle.
In the coming times, the RBI and the government must work in a well-coordinated manner keeping growth impulses in mind to meet the aspirations of people for a better living experience.
The central government lowered its fiscal deficit estimate for 2024-25 to 4.8 per cent of the GDP from 4.9 per cent. It also budgeted a 4.4 per cent deficit for FY26, seen as helping anti-inflationary measures.
On the borrowing front, the government has pegged just 6 per cent growth in gross borrowing at Rs 14.8 lakh crore for FY26, one of the lowest in recent years compared to the nominal GDP growth rate. The net borrowings pegged for the next year were even slightly lower than the current financial year. Officials reckon that the gross borrowing would have shot up significantly next year had the government not done buybacks and switching of Rs 2.35 lakh crore of dated securities this fiscal.
The states and the private sector would stand to benefit from the fiscal consolidation of the Centre. The yields on the Central government’s bonds which are ruling at a lower level now serve as a benchmark for determining yields for borrowings made by states and the private cost by reducing their borrowing costs.
The Centre’s buyback and switching of bonds for longer tenure has also aided the RBI’s effort to ease the liquidity situation. The RBI governor Sanjay Malhotra has also said the central bank will be agile in responding to the liquidity needs of the banking system, both transient and durable to ensure that credit continues to flourish.
In India, food inflation is a major driver of overall retail inflation. The Budget unveiled several plans to address food prices in the long term. These include the Prime Minister Dhan-Dhaanya Krishi Yojana – Developing Agri Districts Programme in partnership with states. It aims to enhance agricultural productivity, adopt crop diversification and sustainable agriculture practices, augment post-harvest storage at the panchayat and block level, improve irrigation facilities, and facilitate the availability of long-term and short-term credit. This programme is likely to help 1.7 crore farmers in 100 districts.
In order to curb imported inflation in edible oil, the government will now launch a 6-year “Mission for Aatmanirbharta in Pulses” with a special focus on Tur, Urad and Masoor. Similarly, to cater to rising consumption of vegetables, fruits and shree-anna or millets, a comprehensive programme to promote production, efficient supplies, processing, and remunerative prices for farmers will be launched in partnership with states.
These measures taken together with other fiscal measures are expected to create a conducive environment to keep prices at moderate levels on a durable basis to ensure that the economy grows at over 7 per cent to achieve the goal of a developed India by 2047.
In January, the CPI inflation moderated to 4.3 per cent from 5.2 per cent in December, primarily due to a slowdown in food inflation. Inflation in food and beverages fell to 5.7 per cent in January from 7.7 per cent in December. Meanwhile, core inflation continues to remain subdued at 3.7 per cent, staying below the 4 per cent mark over the past year. The fuel and light category continued to remain in deflation territory. While the recent depreciation of the rupee could exert pressure via imported inflation, the relatively low core inflation should help mitigate any significant concerns.
Although rupee depreciation increases inflation on imported inputs, it also adds to export competitiveness, thus should not be a cause of alarm.
To sum it up, the overall preference of policymakers in recent years has been macroeconomic resilience over chasing short-term spurts of growth. This has been manifested through the central government’s unwavering commitment to fiscal consolidation post-Covid from FY22. Fiscal policymakers continue to prioritize strengthening the balance sheets of the public sector to create a long runway of high and stable growth, possibly easing the task for the RBI to keep interest rates at moderate levels.
