Just days before the Union Budget, the Reserve Bank of India (RBI) has opened the liquidity tap, further fuelling expectations of a potential rate cut next week.
Market experts, however, are of the view that if the Finance Minister announces growth-oriented measures in the budget while maintaining fiscal discipline, it would create the right conditions for a 25-50 basis points rate cut in the RBI's February meeting.
"It wouldn’t be surprising if the RBI goes for a larger 50 bps cut in February," said independent market analyst Ambareesh Baliga, following the RBI’s recent liquidity measures. These steps, including a mix of forex and money market initiatives, aim to infuse Rs 1.5 lakh crore into the system, responding to demands for liquidity support.
In a similar context, Piyush Mehta, CIO & Partner, Caprize Investment Managers says that while the Finance Minister’s options are limited, the focus must be on stimulating the economy while reducing the deficit. "With lower spending last year, this year’s emphasis on capital expenditure over revenue spending is crucial," he explained. Mehta forecasts a 25 bps cut in February and a total of 75 bps over the year.
To align with the RBI’s dovish stance, the Budget must strike a balance between encouraging growth and ensuring fiscal discipline, say experts.
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Factors from Budget to influence RBI's rate cut path
Market expert Deepak Jasani highlighted three key factors the RBI will focus on in the Budget: India’s GDP growth forecast for FY26, the fiscal deficit target, and the government’s borrowing plans. These factors will directly influence interest rates. Higher borrowing could push rates up, while tighter fiscal management could ease them, with experts predicting a 25 bps rate cut in February and 75-100 bps in total for the year.
According to a Moneycontrol poll, the government is expected to announce market borrowing of Rs 14-15 lakh crore for FY26, compared to Rs 14.01 lakh crore target for FY25. Growth projections are also under the spotlight.
While the government’s first advance estimates released in January projected nominal GDP growth at 9.7 percent, analysts at Antique predict an 11 percent growth rate for FY26, indicating optimism for an economic rebound.
On the fiscal side, the government’s commitment to fiscal consolidation will be key. Antique projected the fiscal deficit for FY26 to narrow to 4.5 percent of GDP, down from 4.9 percent in FY25. This disciplined approach is necessary to maintain investor confidence while ensuring adequate resources for growth initiatives.
Beyond growth and fiscal management, the Union Budget is expected to address concerns of the middle class, with possible tax reforms and incentives.
Analysts at Antique believe that if the government adjusts tax rates or increases deductions under the new tax regime, it could lead to more people saving and depositing money in banks. This, in turn, would help the RBI lower interest rates further.
When more money is saved and deposited, banks have more funds to lend, making it easier for the RBI to reduce rates without worrying about liquidity shortages. Essentially, these measures would support the RBI's efforts to cut rates by boosting savings and deposit growth.
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