Budget Spurs Spending But Indian Stocks Await RBI Rate Cut For Revival

Investors eyeing the battered Indian stocks received a green light from the government's consumption boost, however, the market has another key test from the central bank to confirm that the stocks have hit a bottom.

Analysts expect a growth-focused policy outcome from the Reserve Bank of India as the stocks saw four consecutive months of selling, the longest monthly selloff in over 23 years. The Reserve Bank of India's first Monetary Policy Committee meeting under its new chief Sanjay Malhotra will end on Feb. 7.

Indian benchmark indices — NSE Nifty 50 and BSE Sensex — are down for four straight months with a fall of 9.9% and 9.1%, respectively. The market has corrected 10 times in the past 10 years with an average fall of 18% before bottoming out.

The Indian stock market and the rupee tumbled on Monday alongside their Asian peers as US President Donald Trump unleashed the global trade war with levies of 25% on Canada and Mexico and 10% on China.

The recent market downturn can be attributed primarily to the Trump tariffs, according to Ruchit Jain, Head - Technical Research at Motilal Oswal. Since the calls for higher tariffs rose in October, there has been a “clear inverse correlation between the markets and the US dollar index,” he said. 

The short-term rise in the dollar index, coupled with Trump-related tariffs, has triggered a global selloff, impacting Indian markets as well, he said. 

The MPC is expected to cut interest rates this week, after retaining status quo for eleven consecutive meets, according to Bloomberg. The repo rate cut anticipation comes after the central bank announced Rs 1.5 lakh crore worth of liquidity measures via open market operations, longer tenure variable rate repo auctions and foreign-exchange swaps.

Markets could react positively if the RBI starts cutting rates this time, Jain said. The RBI is expected to start cutting rates, but it is unlikely to be aggressive, he said, adding that the budget saw the government shift its focus from capex to consumption. Any rate cuts would provide an additional boost to consumption, he said. 

Sectors related to consumption, such as FMCG and auto, would likely react positively if the RBI implements rate cuts, Jain said. "While the broader market will be more influenced by global factors, sector-specific movements may be observed within India."

In a bid to revive the urban and rural demand, Nirmala Sitharaman in her budget speech said that individuals with income up to Rs 12 lakh will be exempt from paying income tax. This is against the previous cap of Rs 7 lakh.

Further, the Narendra Modi government eyes to narrow the budget deficit for fiscal 2026 to 4.4% of the gross domestic product, slightly below the 4.5% previously estimated.

Analysts noted that this budget marks a shift from capex-heavy spending towards a more balanced approach, prioritising inclusive development and demand-driven growth. Sitharaman, however, emphasised that capex remains one of India's primary growth drivers and focus on consumption is "not a pivot."

The pressure for the new governor will also come from the currency front. The rupee turned into Asia’s second worst-performing currency this year, after beating most peers last quarter. Since Malhotra taking office, the currency has fallen over 2%, along with its Asian peers.

Indian stocks will see a bounce-back soon after witnessing the second longest of the 10 corrections in the last decade if the RBI takes a pro-growth stance, Jefferies said earlier in a report.

The benchmark Nifty should bottom out before Feb. 07, assuming no tax surprise in the Budget and a pro-growth RBI, analysts at the brokerage firm had said.

The upcoming monetary policy committee meeting in February will likely "spring positive surprises," it said. The brokerage said that the measures can take a growth-favoured approach.