Finance Minister Arun Jaitley's Union Budget came as a disappointment to the middle class; no tax break was announced in the Budget, while service tax was hiked from 12.36 per cent to 14 per cent increasing the tax burden on middle class.
But the Budget's focus on fiscal consolidation is likely to go down well with Reserve Bank Governor Raghuram Rajan, analysts say. The Union Budget on Saturday loosened the reins on public spending to drive growth, but promised lower-than-expected borrowing despite raising the fiscal deficit target.
According to Morgan Stanley, the RBI could cut interest rates this week. The investment bank expects interest rate cuts totaling 125 basis points this year.
"We maintain our view for front loaded RBI cuts, with the possibility of another inter-meeting rate cut in March, or a more aggressive cut in April," Morgan Stanley said.
A reduction in interest rate will be good news for home loan consumers and those planning to take a loan to buy houses and cars. The RBI had unexpectedly cut the repo rate by 25 basis points to 7.75 per cent in mid-January, raising hopes that EMIs will start coming down. But most banks did not pass the benefits of rate cut to consumers.
In a report, Bank of America Merrill Lynch said, "We continue to expect RBI Governor Rajan to cut policy rates 25 basis points on April 7 (and June) with the Budget meeting his pre-condition of fiscal consolidation and inflation set on his 6 per cent January 2016 target."
Two key officials in the Finance Ministry also made a case for interest rate cuts. "RBI is a very professional, data-driven organisation and the data right now is very compelling in terms of interest rates being reduced further," Minister of State for Finance Jayant Sinha told a newspaper.
Finance Ministry's Chief Economic Adviser Arvind Subramanian said Budget annoucements and the easing in inflation should "open the space for easing of monetary conditions".
India's consumer prices inflation accelerated to 5.11 per cent in January, after shifting to a new base year for calculating prices, but stayed well below the central bank's target, bolstering prospects for further interest rate cuts.
RBI's next policy meeting in due in April, 2015.
(With inputs from Reuters)