Rate cut in Sep best possible option for RBI amid low inflation, GST reforms: Report

New Delhi, Sep 22 (IANS) With inflation poised to decline to a historical low since 2004 with GST rationalisation amid India-US trade talks back on track, a rate cut in September is the best possible option for RBI which also projects it as forward-looking central bank, an SBI report said on Monday.

The RBI Monetary Policy Committee (MPC) meeting is scheduled from September 29-October. The RBI maintained the policy rate at 5.50 per cent during its August meeting, following significant easing in the prior session.

According to Dr Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India (SBI), “we believe that the bottom of CPI inflation may not yet reached, and it may further decline by 65-75 bps due to the huge GST rationalisation.

“Inflation will continue to remain benign even in FY27 and without a GST cut, it is tracking below 2 per cent in September and October. CPI FY27 numbers are now tracking 4 per cent or less and with the GST rationalisation, October CPI could be closer to 1.1 per cent — lowest since 2004,” Ghosh noted.

Experience of 2019 also indicate that the rates rationalisation (primarily focused on reducing rates for common goods to 18 per cent from 28 per cent) led to almost 35 bps decline in overall inflation in just couple of months.

Additionally, with new CPI series, “we expect further moderation of 20-30 bps in CPI. All these factors (GST, base revision) indicate that CPI inflation will remain around lower end of inflation target (4+2 per cent) for entire FY26 and FY27,” the report highlighted.

According to Ghosh, there is merit and rationale in going for a September rate cut.

“This will but require calibrated communication by the RBI as post June, the bar for rate cut is indeed higher. But there is no point in committing a Type 2 error again (No rate cut with Neutral Stance) by not cutting rates in September as inflation will continue to remain benign even in FY27 and without a GST cut, it is tracking below 2% in September and October,” Ghosh stressed.

—IANS

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