Double delight for common man: After tax cuts, RBI slashes repo rate by 25 basis points

Tax cuts, repo rate reduction are expected to help in spending boost

It's a power-packed week not just for the Indian economy but for the common man as the government and the RBI worked in tandem to provide succour to the growth-starved economy hoping that the tax cuts and interest rate reduction manages to boost consumption.

The RBI's Monetary Policy Committee (MPC) cut the repo rate by 25 basis points to 6.25% from 6.5% earlier in a bid to reinstate the economic momentum by aiding consumption, a key lever for growth.

The rate cut comes in the wake of the Finance Minister Nirmala Sitharaman announcing much-needed relief for the common man in the Budget by reducing tax rates. No income tax will be paid on income of up to Rs 12 lakh a year, the FM announced.

The tax foregone in the process is to the tune of Rs 1 lakh crore. This booster shot for the economy comes at a point when the economic momentum has slowed. The second quarter economic growth came in at 5.4% while the first advance estimates put the full year growth for FY25 at 6.4%.

Track MPC updates here

RBI Governor Sanjay Malhotra acknowledged the slowing growth in his speech stating that the growth-inflation dynamics has opened up space for measures to support growth.

"The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points to 6.25 per cent."

The RBI Governor's speech mentioned the tax cuts in the Union Budget saying that the household consumption is expected to improve on the back of improving employment conditions, tax cuts along with moderating inflation.

"On the demand side, rural demand continues to be on an uptrend, while urban consumption remains subdued with high frequency indicators providing mixed signals. Going forward, improving employment conditions, tax relief in the Union Budget, and moderating inflation, together with healthy agricultural activity bode well for household consumption."

The Economic Survey presented a day before Budget pegged India's economic growth in the range of 6.3-6.8%. The Chief Economic Advisor V. Anantha Nageswaran. The RBI's projection for next fiscal are close to the upper end of the band at 6.7%.

Gunning for growth

With two major policy events out of the way, it remains clear that the efforts are directed to nudge the economic growth higher. A lower interest rate regime bodes well for consumption and investment.

The solid macro picture in terms of fiscal deficit being in fine fettle may have offered the wiggle room for the RBI to dole out a 25 basis points rate cut. The twin boosters are necessitated at a time when the global economy is gripped by heightened uncertainty. US President Trump has walked the talk on his tariff threats.

"Headwinds from geo-political tensions, protectionist trade policies, volatility in international commodity prices and financial market uncertainties, continue to pose downside risks to the outlook," the MPC statement read.

Inflation under control?

With inflation projection unchanged, the RBI doesn't see falling rupee posing a threat to inflation. The RBI projected retail inflation at 4.2% for next fiscal. The RBI governor, responding to a question in post-policy press conference, said that the latest level of the rupee has been taken into account while making the inflation projections.

The RBI, in its statement, said that food inflation is expected to soften on the back of good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects.

"The MPC would have got comfort from the expectation of a moderating food inflation and under check core inflation giving an inflation estimate for FY26 at 4.2%. It has delivered the required monetary policy support to the economy and this combined with the consumption boost from the tax relief announced in the budget should give momentum to demand and pushing the FY26 growth rate to the higher end of the 6.3% to 6.8% growth range anticipated in the Economic Survey," said Ranen Banerjee, Partner and Leader Economic Advisory, PwC India.