Time ripe for rate cut: Finance Secretary Tuhin Kanta Pandey

The government has been prudent with its fiscal policy while also spurring growth, and it is “appropriate time” for a rate cut by the Reserve Bank of India (RBI), finance secretary Tuhin Kanta Pandey said on Sunday, adding, “inflation is waning, both domestically and externally.”

The official noted that central banks around the world are cutting rates because inflation is easing. “We’re maintaining the fiscal deficit, because if we don’t, it may be inflationary. We’ve also done our bit in an attempt to boost consumption through several measures, including income tax relief. Now people are waiting for measures from the monetary policy perspective,” Pandey, said in an exclusive post-Budget interview.

In the backdrop of lower-than-expected growth, several economists and market participants have been batting for a cut in the policy repo rate, which has remained unchanged at 6.5% since February 2023. As the next meeting of the monetary policy committee is slated for February 5-7, there are heightened expectations of the start of a rate cut cycle. “Recently falling inflation, softer growth, and limited fiscal support mean monetary policy may have to take over the growth baton. We expect two rate cuts of 25 bps each in H12025,” HSBC Global Research wrote recently.

In November, the finance ministry in a report had criticised the RBI’s monetary policy actions, saying that “combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown” in the economy.

CPI inflation in FY25 is projected by the RBI to fall to 4.8%, and in FY26 to 4.5%. The Economic Survey 2024-25 noted that going forward, food inflation is likely to soften in Q4 FY25, and good rabi production is likely to contain food prices in the first half of FY26. “Global energy and commodity prices have softened in the recent past, making the core inflation outlook benign,” it had said.

The Survey, however, added that risks of “synchronised price pressures” linger due to potential geopolitical disruptions such as tensions in West Asia and the ongoing Russia-Ukraine conflict. Also, the pace of rate cuts varies across regions depending on the growth imperatives and the pace of disinflation.

The finance secretary conceded that there are geopolitical headwinds to growth.

“Were the outside situation favourable, it would have shown in export momentum, but that’s not the case…we’re a labour surplus economy, we could have boosted production, but that’s not happening.”

In the present scenario, the growth rate projected by the Economic Survey seems realistic, he said. The survey has projected growth in FY26 to be in the range of 6.3-6.8%.

The finance secretary further said that the income tax relief granted to the middle class — no tax payable up to Rs 12 lakh of annual income— may also prompt some individuals to park the money in savings accounts and some to invest in assets. “Banks are not flush with money, if they get more deposits, they will welcome it.”

On the changes in basic customs duty (BCD) rate structure, undertaken in the Budget, Pandey said it had been done to stimulate economic activity, rather than a reaction to US President Donald Trump’s threat of raising tariffs against shipments from India.

The government in the Budget announced scrapping of seven rate slabs as part of an exercise of rationalisation of the tariff structure. This, however, would not result in any reduction in overall tax incidence on the goods covered, because of the imposition of an agriculture infra cess. On some items, however, tax incidence will come down marginally.

Pandey said the Budget projection of a 2.1% growth in collections from customs duty factors in the changes made in BCD rates, but added that the government doesn’t see customs as a source of revenue.

On the Organisation for Economic Co-operation and Development’s (OECD) anchored Pillar 1 and Pillar GLoBE rules, Pandey said that the government needs to “evaluate how it will pan out”.

The US — which recently withdrew from the two-pillar tax deals — is very important, because many of the large, big-tech companies are based out of the country, and investments and other companies are coming into India, said Pandey. “So I think we have to evaluate how it comes. We have not brought in any taxation measures (to comply with two-pillar solution)…many other countries have, but we haven’t,” he added.