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One key takeaway from Union 2025 presented by FM Nirmala Sitharaman and the rate cut by the RBI is a congruence of focus on boosting household consumption across rural and urban India as a means of boosting economic growth.
Boosting the consumption was the need of the hour, which the budget has directly addressed by increasing zero income tax threshold to Rs 12 lakh.
Authored By Sanjay Chawla:
What’s the one key takeaway from the Budget 2025 presented by Finance Minister Nirmala Sitharaman and new RBI Governor Sanjay Malhotra’s first-ever monetary policy committee meeting? The answer is a congruence of focus on boosting household consumption across rural and urban India as a means of boosting economic growth.
This is in stark contrast to the earlier approach of the government trying to crowd in private investments by spending on capital expenditure for public projects in the hope of getting Indian Inc to respond with a capex cycle of its own driving demand for everything from steel to cement and in between.
The Union Budget 2025-26 is a fine balancing act between propping consumption, keeping the investment momentum and maintaining fiscal discipline. The budget has “walked the talk” in providing higher disposable income in the hands of the middle class thereby directly addressing the slowdown in consumption. Boosting the consumption was the need of the hour, which the budget has directly addressed by increasing zero income tax threshold to Rs 12 lakh. This can help boost the disposable income in the hands of people by nearly Rs 1 lakh on an overage. The urban slowdown has been well documented in recent months. This step will clearly go a long way in boosting the sentiments as well as demand for discretionary consumption.
The jugalbandi between the central government and the central bank was evident when on Friday February 7, 2025, the RBI’s Monetary Policy Committee (MPC) after a span of 5 years unanimously delivered a rate cut of 25 bps, bringing down the repo rate to 6.25 per cent. The repo rate is the rate at which RBI will lend to commercial banks by temporarily purchasing specified government bonds. This is also a key rate used by banks to determine interest rates they, in turn, charge to their borrowers.
The RBI also readjusted the Liquidity adjustment facility (LAF) interest rate to 6 per cent [Standing deposit facility (SDF) – Marginal standing facility (MSF) range]. What’s more is the RBI’s projections for GDP growth at 6.7 per cent for FY26 and inflation at 4.2 per cent, setting the backdrop for a calibrated rate cut cycle. This should hopefully lead to lower EMIs for borrowers of home loans and lesser outgo on term loans taken by industries to set up new facilities or expand capacity.
Meanwhile, the central government itself has not reduced its projected investment spend in core areas such as infrastructure and defence. The pièce de résistance is that the budget also keeps the promise of fiscal consolidation by maintaining the glide path for the fiscal deficit which is now in touching distance of the near-term target of 4 per cent with fiscal deficit projected to decline from 4.8 per cent of GDP in FY25 to 4.4 per cent in FY26.
India remains one of the best growth stories among top-10 economies across the world. Secondly, we are resilient with multiple levers of growth aiming to ensure a smooth ride through uncertain global conditions. From portfolio positioning we would incrementally be inclined to discretionary consumption.
(The author is chief investment officer-equity, Baroda BNP Paribas Mutual Fund)
