Inflation in India is set to hit a historic low not seen since 2004. This decline is driven by GST rationalization and improving India-US trade relations. A September rate cut is now the best possible option for the Reserve Bank of India. Such a move would also position the RBI as a forward-looking central bank, according to an SBI report released on Monday.
The RBI Monetary Policy Committee meeting is scheduled from September 29 to October. During its August meeting, the RBI kept the policy rate steady at 5.50 percent. This followed significant easing in the prior session, setting the stage for future adjustments.
Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, shared critical insights. He believes the bottom of CPI inflation has not yet been reached. It may decline further by 65-75 basis points due to massive GST rationalization efforts.
Inflation is expected to remain benign even into fiscal year 2027. Without a GST cut, it is tracking below 2 percent in September and October. With rationalization, these numbers could drop even more dramatically.
Ghosh noted that CPI for FY27 is now tracking at 4 percent or less. October CPI could approach 1.1 percent, the lowest since 2004. This steep decline highlights the powerful impact of recent fiscal measures.
Historical experience from 2019 supports these projections. Rate rationalization then focused on reducing rates for common goods from 28 percent to 18 percent. This led to a 35 basis point decline in overall inflation within just a couple of months.
The introduction of a new CPI series is another factor. It is expected to bring further moderation of 20-30 basis points in CPI. Combined with GST changes, this ensures inflation remains at the lower end of the target range.
The inflation target is set at 4 percent with a 2 percent band. These factors indicate CPI inflation will stay around the lower end throughout FY26 and FY27. Stability seems achievable over the medium term.
All these elements create a compelling case for action. There is clear merit and rationale for opting for a September rate cut. The economic environment supports such a decisive move by the central bank.
A rate cut would provide additional stimulus to the economy. It aligns with current inflationary trends and fiscal improvements. The RBI has an opportunity to reinforce growth momentum.
Market participants are closely watching the upcoming MPC meeting. Expectations are building around a potential policy shift. The September decision could mark a significant turning point.
The combination of low inflation and GST reforms creates an ideal backdrop. It allows the RBI to act proactively and support economic objectives. Timing is crucial for maximizing positive impact.
Dr. Ghosh and the SBI report emphasize the importance of seizing this moment. A September rate cut is not just possible. It is the best possible option available right now.
The RBI’s approach will be closely analyzed by economists and investors alike. Its decision will signal confidence in managing future economic stability. All eyes are on the end-of-September meeting.