The recent income tax relief announced in the Union Budget 2025 has provided a major financial boost to the middle class. With Finance Minister Nirmala Sitharaman revising tax slabs and making income up to ₹12 lakh tax-free, many taxpayers are set to benefit from increased disposable income.
This move is expected to drive consumption and stimulate economic growth. Now, all eyes are on the Reserve Bank of India (RBI) as it prepares for its upcoming Monetary Policy Committee (MPC) meeting.
The question on everyone’s mind is whether the central bank will complement the Budget’s relief measures by cutting interest rates.
The RBI’s MPC meeting, scheduled for February 5-7, is set to be a crucial event for the financial markets. Analysts and economists are widely speculating that the central bank may announce a 25 basis points (bps) cut in the repo rate.
Such a decision would ease borrowing costs, particularly benefiting the middle class by reducing monthly loan repayments and encouraging economic activity.
One of the key factors influencing the RBI’s decision is inflation. The Economic Survey 2025 has projected that inflation will gradually decline to around 4 per cent despite global uncertainties.
Additionally, economic growth has shown signs of slowing down, making the case for a rate cut even stronger. Lower interest rates would provide much-needed support to the economy by boosting investment and spending.
Financial experts have pointed out the significance of the tax relief in the Budget and its impact on consumer spending.
Adhil Shetty, CEO of Bankbazaar.com, explained that under the new tax regime, individuals earning ₹25 lakh annually will see their tax liability reduced from ₹4.57 lakh to ₹3.43 lakh. This translates to approximately ₹9,500 in monthly savings, giving taxpayers greater financial flexibility.
Pradeep Gupta, Co-founder and Vice-Chairman of Anand Rathi Group, emphasised that tax relief measures will likely increase discretionary spending, particularly among middle and upper-middle-income groups.
This surge in spending could drive growth in sectors such as retail, real estate, and automobiles, further supporting the broader economy.
Expectations for an RBI rate cut have been gaining momentum due to evolving economic trends. Rahul Bajoria, an economist at BofA Securities India, believes that both growth and inflation data indicate the need for monetary easing.
He anticipates a 25bps cut in the repo rate to 6.25 per cent in February, potentially followed by additional measures to inject liquidity into the financial system.
He also suggested that a further reduction in the Cash Reserve Ratio (CRR) or large-scale bond purchases through open market operations could help stabilise short-term interest rates.
Bajoria also noted that if inflation remains close to the 4 per cent target throughout 2025, the RBI could cut rates by as much as 100bps in this cycle. Such a move would bring the repo rate down to 5.50 per cent by the end of the year, aligning it with a neutral stance aimed at sustaining growth.
Another economist, Garima Kapoor from Elara Securities, echoed similar sentiments, predicting a 25bps rate cut in February followed by further reductions throughout the year.
However, she also highlighted potential risks arising from external economic conditions, which could influence the RBI’s policy decisions.
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