With lower income-tax, can RBI's repo rate cut boost urban consumption?

The Reserve Bank of India's 25 basis points cut in the repo rate, coming after a gap of nearly five years, is expected to lessen the EMI (debt) burden on middle-class households.

As banks are expected to slowly pass on the rate cut — from 6.5 per cent to 6.25 per cent — to borrowers who have taken loans for buying cars, homes and home appliances, reduced EMIs would likely leave a little more cash in their hands for discretionary purchases.

The recent Union Budget’s income tax boost, where individuals earning up to Rs 12 lakh in a year will not be liable to pay any tax, is also expected to lift the moribund urban consumption to some extent.

But the extent of the fillip to consumption in urban pockets, which have been witnessing a demand slump, remains to be seen.

Also read: RBI rate cut: Relief for common man as car, home loans may get cheaper

Urban demand compression

Malhotra noted in his speech that while rural demand is growing, urban demand continues to be subdued. “Going forward, improving employment conditions, tax relief on the Union Budget and moderating inflation, together with healthy agricultural activity, bode well for household consumption,” he said.

The RBI's rate cut comes just when India’s economic growth has been slowing. The first advance estimates put out by the Union government earlier projected the slowest GDP growth in four years this fiscal, at 6.4 per cent.

This slowdown is being attributed to urban demand compression, decline in private investments and sticky inflation — which have together punctured incomes and expenditures of the aam aadmi. Consumption accounts for a lion’s share — around 60 per cent of GDP.

Also read: Budget | FM retains firm hold on fiscal discipline; ball now in RBI's court?

Much depends on transmission

ANAROCK Property Consultants responded to the rate cut saying the RBI’s decision, coming just after the Union Budget income tax bonanza, “is undeniably a major boost to the homebuyers, particularly for affordable housing buyers".

"Many first-time homebuyers who had been hesitating to take the plunge are likely to make their move now as home loan rates will reduce – as long as banks pass on the key benefits to buyers,” it said in a statement. But it cautioned that the rate cut may be made less effective “by rising property prices if inflation remains as high as it is now. Also, it remains to be seen if banks pass on the full benefit to borrowers in a timely and seamless manner.”

Housing prices have risen across the top seven cities over the past year, rising on an average by 13-30 per cent in these cities. The Delhi-NCR region recorded the highest jump at 30 per cent.

Also read | Tax relief or economic mirage? The middle-class dilemma

Market buoyancy

Samantak Das, Chief Economist and Head of Research and REIS, India, JLL, said he anticipates sustained market buoyancy in the homebuyer segment after today’s rate cut after a lag in the December quarter.

“We anticipate this rate cut to be a catalyst, igniting homebuyer sentiment, enhancing affordability, and potentially unleashing a new wave of demand in the housing market. While 2024 was the best year ever in terms of sales and market activity, rising prices were beginning to have a lagging effect on market momentum, as evidenced by a decline in Q4 2024 sales numbers.

"The rate cut, coupled with budget tax benefits favouring mid-income buyers, will provide additional support to homebuyers and help sustain market buoyancy," he noted.

Also read: No income tax up to Rs 12 lakh: Know the revised slabs under new regime

FMCG firms see urban drag

Just yesterday, the Managing Director of Nestle India, Suresh Narayanan, said while addressing investors and analysts that urban consumption growth has tapered, but rural growth is looking upwards. “But yet, the cause for concern on (consumption) growth continues to remain. We are not out of the woods yet. Urban unemployment, tepid real wage growth and post-COVID moderation are what we see as three big reasons,” he said.

Narayanan noted that the Union Budget proposals aim to put on the table Rs 1 lakh-crore (revenue foregone through the income tax easing). “I hope part of this comes into consumption, part of it will go into paring down debt and into savings — even if some of it comes into consumption it will be a positive fillip," he said.

Also read | Budget | Can I-T relief spur squeezed urban consumers to spend more?

And, in a presentation after the December quarter results, Britannia – India’s biggest cookie maker by value – noted that rural disposable income growth is expected to reach 11.9 per cent in the second half of the current fiscal. The company has been expanding its rural distribution network to reach 31,000 stores by Q3 FY25 and was seen beating estimates on quarterly profit by reporting 5 per cent growth, in part due to rural demand recovery.

Ditto for ITC, which sells a range of FMCG products from cigarettes to packaged foods, and which has also highlighted improving agricultural incomes as a key reason behind rural demand recovery.