The modest increase in capex and continuation of fiscal consolidation by finance minister Nirmala Sitharaman in 2025-26 Union Budget may ramp up the pressure on new Reserve Bank of India (RBI) governor Sanjay Malhotra and his colleagues at the monetary policy committee (MPC) to cut rates and lift the economy from a slowdown.

The three-day meeting of the interest rate setting body will commence on February 5.

While many in the Street are of the view the panel will slash the policy repo rate by 25 basis points, few feel it could hold rates for just one more time and initiate the cycle of lower borrowing costs in April.

Then there are the more optimistic ones who feel the RBI will not only cut interest rates but also bring down the cash reserve ratio (CRR) again to infuse liquidity into the banking system. In December, the MPC had brought down CRR by 50 basis points to 4 per cent.

In the Union budget for 2025-26, Sitharaman gave good news to the middle class when she announced tax reliefs under the new regime, which is expected to lead to a pick-up in consumption, particularly in urban India.

However, she announced a capex increase of 10 per cent to ₹11.2 lakh crore (3.4 per cent of GDP) for 2025-26, disappointing the markets which were expecting a much larger capex push has a better multiplier effect on the economy.

“Fiscal compulsions may have led to the FM announcing only a 10 per cent increase in capex. However, she did her bit by boosting consumption via lower taxes which will benefit certain sectors. She has also kept the fiscal deficit lower. The weight will now fall on the RBI to bring down interest rates and push private capex to drive economic growth,’’ an analyst said.

The budget has pegged India’s fiscal deficit to comeat 4.4 per cent of GDP in 2025-26, lower than 4.8 per cent in 2024-25.

“The only question one can possibly ask is, would a slightly higher capex and a slightly higher fiscal deficit have been better? But one wonders if the government is nudging the RBI to cut rates by keeping the fiscal deficit in check,’’ a note from JM Financial said.

“A push for the lower- and middle-income households — where the propensity to consume is high — could provide the much needed sentiment boost to get the private investment cycle rolling,’’ economists at HDFC Bank said. They expect the RBI to engage in a shallow rate cutting cycle of 50-75 basis points in 2025.

While bond yields are expected to soften following the budget proposals, which put the gross borrowing target at ₹14.82 lakh crore, and potential rate cuts by the RBI, stock market circles do not rule out some improvement in the sentiment when trading resumes on Monday.

For the near term, stock prices are likely to be influenced by corporate results, any actions by the Trump administration and the RBI monetary policy.