Rate cut in September best option for RBI amid easing inflation, GST reforms: SBI report

New Delhi- With inflation set to fall to its lowest level since 2004 and GST rationalisation underway, while India-US trade talks resume, a rate cut in September would be the best option for the Reserve Bank of India (RBI), positioning it as a forward-looking central bank, according to a State Bank of India (SBI) report released on Monday.

The RBI Monetary Policy Committee (MPC) is scheduled to meet from September 29 to early October. In August, the central bank held the policy rate steady at 5.50 per cent after a round of significant easing in its previous meeting.

Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, said, “We believe the bottom of CPI inflation has not yet been reached, and it could decline further by 65–75 basis points due to major GST rationalisation.”

He added that inflation will remain subdued even in FY27. Without a GST cut, it is already tracking below 2 per cent in September and October. Projections for FY27 CPI inflation are now around 4 per cent or less, and with GST rationalisation, October CPI could drop to around 1.1 per cent — the lowest since 2004.

The report recalled that during the 2019 round of GST rate cuts — which reduced tax rates on common goods from 28 per cent to 18 per cent — inflation fell by nearly 35 basis points in just a few months.

Further, with the introduction of a new CPI series, SBI expects additional moderation of 20–30 basis points. Taken together, these factors (GST cuts and base revision) point to CPI inflation staying near the lower bound of the RBI’s target range of 4% ± 2% throughout FY26 and FY27.

Ghosh argued there is strong merit in a September rate cut. “This will, however, require careful communication by the RBI, as after June the bar for rate cuts is indeed higher. But not cutting in September could be a mistake — a Type 2 error — since inflation will remain benign even in FY27, tracking below 2% in September and October without any GST cut,” he stressed.

With inputs from IANS