The key reform policies announced by Finance Minister Nirmala Sitharaman in Budget 2025, particularly the focus on fiscal consolidation, the return of Donald Trump as US President that led to rise in global trade tensions, a slowing domestic economy, the stubborn inflation, are few of the many things the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is going to discuss in its three-day meeting that starts today (February 5). Tanvee Gupta Jain, Chief Economist, UBS India, said, “Incorporating the fiscal announcement and recent measures by the RBI to ease interbank liquidity deficit, likely shallow monetary easing (we expect 75bps repo rate cut ), inclination towards greater exchange rate flexibility (allowing INR depreciation in a manageable manner could also enhance export competitiveness) and focus on persistent structural reforms, should help to boost India’s growth towards 6.5 per cent YoY in FY26/27.”
The RBI MPC will commence its final meeting of the financial year today and the decision on interest rats will be announced by the governor of the central bank, Sanjay Malhotra on February 7. The RBI conducts six bi-monthly meetings each fiscal year and before this, the RBI MPC had met on December 4-6, October 7-9, August 6-8, June 5-7, and April 3-5. Interestingly, this is the first MPC meet under the leadership of the newly appointed RBI Governor Sanjay Malhotra. In December, he took charge as the 26th governor of the central bank for the next 3 years, replacing Shaktikanta Das.
In its October meeting, the central bank had changed its stance to ‘neutral’ and later in the December MPC meet, the cash reserve ratio (CRR) was cut by 50 basis points. However, there has been no action in the repo rate in the past for two years and it had been left unchanged at 6.50 per cent. Economists said that the February meet will commence the rate cut cycle with a 25 bps cut. The RBI is also expected to add durable liquidity and keep a close watch on currency to limit excessive volatility.
Deepak Agrawal, CIO-Debt, Kotak Mahindra AMC, said, “The Union Budget FY2025-26, continued to be fiscally prudent, the slower GDP growth rate as per NSO and the Economic Survey 2025, falling headline inflation since October’24, and expectation of lower inflation in coming financial year, we expect a 25-bps rate cut in the forthcoming policy with the stance remaining unchanged at ‘neutral’.”
Govt sticks to its promise of staying on path of fiscal prudence- How will RBI react to this?
Budget 2025 played a balancing act to boost near-term growth (gradual fiscal consolidation with focus on consumption) and also laid down the economic framework to boost India’s medium-term growth (focus on improving ease of doing business, deregulation, 100 per cent FDI in insurance amongst others). The central government slowed down the pace of fiscal consolidation in FY26 and targeted to bring down the fiscal deficit to 4.4 per cent of GDP in FY26 (from 4.8 per cent of GDP in FY25RE). Further, in her Budget speech, Nirmala Sitharaman also announced income tax relief for middle class households, to the tune of $12bn, 0.3 per cent of GDP, to give boost to urban consumption. “We think continued reliance on dividend transfer (from RBI and PSUs) and budgeting lower non-interest revenue expenditure (4.2 per cent YoY in FY26BE vs. 5.3 per cent last year) helped government target lower fiscal deficit in FY26. From FY27E, the government highlighted that it would endeavour to keep fiscal deficits in each year (from FY27 till FY31) such that the central government debt is on a declining path to attain a debt to GDP level of about 50±1% by end March 2031 (from 57.1 per cent in FY25RE). This would help rebuild buffers and provide space to policymakers for growth enhancing expenditures as and when needed,” said Tanvee Gupta Jain.
10-year government bond yield to decline to 6.25 per cent in FY26
UBS EM Macro strategist, Rohit Arora, noted that over and above the sustained market support from demand-supply dynamics (as was also affirmed by fiscal consolidation at Budget), RBI’s ongoing liquidity easing (via OMO bond purchases) and forthcoming rate cuts would be supportive for bonds. He found the current market pricing of rate cuts as 30-40 bps short of what might be realized this cycle, and hence targeted 10y IGB yield at 6.25 per cent by end CY25, while targeting 5.75 per cent for 5y NDOIS. He has also been highlighted that amidst weak domestic demand, the rupee weakness (or/and any potential shift in RBI’s rupee policy) will not be allowed (by the authorities) to spill over to the rates market.
Earlier, a Bloomberg report had said that the RBI governor is showing a willingness to allow the rupee to move more freely in tandem with peers in the region, while maintaining that he is still intervening in the foreign-exchange market to curb excessive moves. The report, citing sources, said that Sanjay Malhotra has shown keen interest in the RBI’s currency intervention functions and agreed with his team when they explained the recent movements in the rupee and the need to allow it to depreciate.