The budget proposals on agriculture and the commitment to fiscal consolidation, among others, are positive for price stability and would help to anchor inflation expectations over the medium term, RBI Governor Sanjay Malhotra said on Friday, as per the minutes of the latest monetary policy review meeting.

Presenting the Union Budget, Finance Minister Nirmala Sitharaman on February 1 pegged the fiscal deficit target at 4.4% of GDP for the financial year 2025-26. The government has been constantly focusing on reducing fiscal deficit glide path.

The difference between total revenue and total expenditure of the government is termed the fiscal deficit. It is an indication of the total borrowings that the government may need. Budget 2025 prioritises non-inflationary growth through careful fiscal management, with the government’s entire borrowing to be channelled exclusively into capital expenditure.

“These would provide greater impetus to disinflation of headline CPI and its eventual alignment with the target rate in FY 2025-26. CPI inflation for Q4 is projected at 4.2% and that for the financial year 2025-26 at 4.2%,” the RBI Governor said, as per the minutes.

The RBI governor said that in a world order dominated by continuing geopolitical tensions and elevated trade and policy uncertainties, monetary policy, as the guardian of macroeconomic and financial stability, is traversing a challenging time.

“It has to balance a multitude of pressure points and continuously evolving policy trade-offs. Stronger policy frameworks and robust macro fundamentals remain the key to resilience and fostering overall macroeconomic stability,” the minutes quoted RBI Governor.

Domestically too, there is a need to preserve the high growth momentum, while maintaining price stability, necessitating monetary policy to use various policy instruments to maintain the inflation-growth balance.

Headline inflation, after moving above the upper tolerance band of 6% in October, has moderated in November and December. “Going forward, food inflation pressures are likely to see significant easing on robust kharif harvest arrivals, winter season correction of vegetable prices and a promising rabi crop outlook,” he said, as per the minutes.

“The food inflation outlook is turning decisively positive,” he argued. The real GDP growth for the current year is estimated at 6.4%, a softer expansion after a robust 8.2% growth last year.

Even though, the GDP growth is expected to recover in the second half of 2024-25 and 2025-26 from 6.0% recorded in the first half of 2024-25, the growth rate projected by various forecasts for 2025-26 vary from 6.3 to 6.8%.

“This will be supported by healthy rabi prospects and an expected recovery in industrial activity. From the demand side, consumption and investment are also expected to improve,” the RBI Governor said. The Economic Survey 2024-25 tabled on January 31 asserted that India needs to grow around 8% for a decade or two to achieve its Viksit Bharat dreams.

The Indian economy is projected to grow between 6.3% and 6.8% in 2025-26, according to the Economic Survey 2024-25, tabled in Parliament on January 31. Given the macroeconomic outlook when inflation is expected to align with the target and recognising that monetary policy is forward-looking, the RBI Governor voted to lower the policy repo rate by 25 basis points.

“Monetary policy easing, coupled with good agricultural sector growth and various growth supportive measures in the Union. The budget would boost household consumption, investment in housing, capital expenditure, etc, thereby strengthening the pick-up in aggregate demand,” Sanjay Malhotra said.

The RBI monetary policy committee meeting, held during February 5-7, unanimously lowered the repo rate by 25 basis points from 6.5% to 6.25%. Policy stance was kept neutral to allow the MPC flexibility on the future path of policy action. This was the first RBI monetary policy review meeting under Governor Sanjay Malhotra.

This was the first-rate cut in about 5 years. The repo rate is the interest rate at which the Reserve Bank of India lends to commercial banks. The central bank expects growth to improve in 2025-26 to 6.7% from 6.4% in 2024-25. Inflation is projected to come down to 4.2% next fiscal year from 4.8% in 2024-25. These projections also take into account rupee volatility.