RBI rate cut, income tax rebate together to boost consumption, says govt source

RBI Governor Sanjay Malhotra

The Reserve Bank of India's interest rate cut of 25 basis points after almost five years comes close on the heels of the Centre's decision to lower the income tax burden on India's salaried class.

Both these decisions together will complement each other and help boost consumption in the economy, a government official said.

While the cut in income tax is expected to put more cash in the hands of the people thereby improving demand, the rate cut by RBI should help lower borrowing costs, the official added.

The rate cut in RBI's February policy comes a week after Finance Minister Nirmala Sitharaman in the Budget for FY26 exempted people earning up to Rs 12 lakh per year from income taxes, raising the threshold from Rs 7 lakh earlier.

She also made changes in the new tax regime across slabs to provide relief to all categories of India's salaried class.

This along with RBI's Monetary Policy Committee'(MPC) unanimous decision on lowering interest rates after six policy meetings, or 11 months, is expected to spur spending and consequently boost demand in the near-future.

RBI Governor Sanjay Malhotra said that the MPC's decision comes amid a steady decline in inflation as well as a favourable outlook on food prices.

The central bank's inflation projection for FY25 remains unchanged at 4.8 percent.

India's retail inflation eased to a four-month low of 5.22 percent in December, the fourth consecutive month that prices remained over the 5 percent mark.