With inflation poised to fall to its lowest level since 2004 and GST rationalisation underway, a rate cut in September is considered the best option for the Reserve Bank of India (RBI), according to a report by the State Bank of India (SBI). The report also suggests that such a move would reinforce RBI’s image as a forward-looking central bank.
The RBI Monetary Policy Committee (MPC) meeting is scheduled from September 29 to October. During its August meeting, the central bank had maintained the policy rate at 5.50 per cent, following significant easing in the previous session.
Dr Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, said, “We believe the bottom of CPI inflation may not yet be reached and could further decline by 65-75 basis points due to the substantial GST rationalisation. Inflation is expected to remain benign even in FY27, and without a GST cut, it is tracking below 2 per cent in September and October. CPI for FY27 is now tracking 4 per cent or less, and with GST rationalisation, October CPI could fall to 1.1 per cent — the lowest since 2004.”
The report also noted that experience from 2019 indicated that GST rate rationalisation — primarily reducing rates for common goods from 28 per cent to 18 per cent — led to a 35-basis-point decline in overall inflation within just a couple of months. With the new CPI series, further moderation of 20-30 basis points is expected, keeping CPI inflation around the lower end of the target range (4±2 per cent) for FY26 and FY27.
According to Ghosh, a September rate cut is justified, though it will require calibrated communication by the RBI, as the bar for easing has risen since June. “There is no point in committing a Type 2 error again — not cutting rates with a Neutral Stance — as inflation is expected to remain benign even without a GST cut,” he added.
-IANS
