The market is expected to shift focus from the recent Union Budget announcements to the forthcoming Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meeting scheduled for February 7, 2025. Following the Union Budget for the fiscal year 2025-26, financial analysts predict the market sentiment will stabilize, moving attention back to earnings reports and the pivotal decisions from the RBI.
This MPC meeting holds extra significance as it will be the first under the new RBI Governor, Sanjay Malhotra, which has generated heightened anticipation among investors. Experts expect the committee to implement a 25 basis points cut to interest rates to ease market liquidity, addressing key components such as the Cash Reserve Ratio (CRR) and the Reverse Repo Rate.
According to analysis from Motilal Oswal Financial Services Ltd. (MOFSL), the Union Budget signals a fundamental shift from prioritizing capital expenditures (capex) to focusing on consumption and savings. This strategic change is seen as a response to persistently weak economic sentiment and reflects the government’s intention to stimulate domestic demand without resorting to populist measures.
Finance Minister Nirmala Sitharaman's fiscal policy as outlined in the budget maintains emphasis on fiscal deficit consolidation, targeting 4.4% for FY26, which is 10 basis points lower than earlier projections. Such measures are intended not only to encourage economic growth through enhanced consumption but also to maintain fiscal discipline, promoting greater confidence among investors and market analysts.
The flat allocation for subsidies for the third consecutive year—set at 8% of total expenditure for FY26, down from 14% two years prior—reflects the government's commitment to ensuring fiscal responsibility. Industry experts believe this budgetary discipline will positively impact the bond market and strengthen India's position with sovereign rating agencies, thereby creating more room for the RBI to potentially initiate additional rate cuts.
The market's refocus is expected to align with the upcoming corporate earnings announcements, where growth expectations have been tempered. The Nifty is projected to see earnings growth of 5% for FY25, with projections increasing to 16% for FY26. Notably, investors are prioritizing large-cap stocks over those of mid and small caps, which are trading at premiums compared to the Nifty's current valuation of 19.9 times on a one-year forward basis.
"This will be the first policy decision under new RBI Governor Sanjay Malhotra and will be more significant for market sentiment," highlighted IANS. With such high stakes on the table, market observers are closely watching the MPC meeting as the central bank evaluates its monetary policy amid changing economic conditions.
With the overarching economic climate marked by soft consumer sentiment, the RBI faces the challenge of crafting policies conducive to boosting liquidity, spurring economic growth, and fostering investor confidence. The expectation is for fiscal measures adopted by the government to work harmoniously with those of the RBI, optimizing the economic environment.
Overall, as the market digests the Union Budget announcements, clarity about the MPC's policy direction will likely shape investor behavior and market dynamics moving forward. The anticipated intersection of fiscal policy and monetary strategy emphasizes the significance of these upcoming decisions for the Indian economy and its stakeholders.