In order to lower borrowing costs for the middle class, the RBI is anticipated to lower the repo rate by 25 basis points in February. In light of positive inflation forecasts, analysts anticipate a 100 basis point drop in the current cycle, which will promote economic growth.
Now that Budget 2025 has passed, attention is turning to the Reserve Bank of India's upcoming Monetary Policy Committee (MPC) meeting, which is set for February 5-7.By adjusting tax rates, the Union Budget 2024 provided significant relief to the middle class in India. Nirmala Sitharaman, the finance minister, declared that income up to ₹12 lakh will no longer be subject to taxes, up from ₹7 lakh previously.
"A person making ₹25 lakh a year would pay ₹3.43 lakh in total tax under the proposed 2025 tax regime, as opposed to ₹4.57 lakh under the 2024 regime. According to Adhil Shetty, CEO of Bankbazaar.com, this results in a monthly savings of almost ₹9,500 and a 5% increase in cash on hand, which is a significant relief for taxpayers.
According to experts, the FM's action is anticipated to increase consumption and make a substantial contribution to economic growth.
According to Pradeep Gupta, co-founder and vice-chairman of the Anand Rathi Group, "giving personal income tax relief to people making up to ₹24 lakh annually is expected to stimulate consumption, particularly in the discretionary spending segments of the middle and upper-middle-income groups."
Now, all eyes are on the RBI MPC.
The middle class's EMI burden will be lessened if the RBI lowers borrowing costs.
Given the changing patterns of inflation and economic development, there are strong expectations that the central bank would implement a 25 basis point rate drop on February 7.
Food inflation has been a major worry for the RBI, but macro data show that it is decreasing. However, economic growth is slowing down.
According to the Economic Survey 2025, despite global uncertainty, inflation will progressively decline to the 4% target. It also anticipates steady economic growth, but it emphasizes how crucial government organizations are to keeping growth moving forward.
Growth and inflation data, according to India and ASEAN Economist Rahul Bajoria of BofAS India, both indicate that monetary conditions need to be loosened.
According to Bajoria, the RBI may decide unanimously to lower the repo rate by 25 basis points to 6.25 percent at the February MPC. The RBI may also consider lowering the CRR by another 50 basis points or making large bond purchases through open market operations in order to provide long-term liquidity.
In the midst of continuous foreign exchange market intervention, he thinks this can assist avoid spikes in short end rates.
As supply shocks subside, we anticipate that the RBI will prioritize growth based on our inflation and growth predictions. Given a sustained alignment of headline CPI near 4% through 2025, we continue to believe that the RBI could lower rates by 100 basis points over the cycle. By the end of 2025, this will raise the repo rate to 5.50 percent, which we consider to be around the neutral rate," Bajoria stated.
Elara Securities' analyst, Garima Kapoor, predicts that in February, the MPC will lower the policy repo rate by 25 basis points.
"We still anticipate a rate decrease of 25 basis points in February and 75 basis points within the current rate cut cycle. But there are still threats to our exterior view," Kapoor stated.
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