RBI's Rate Cut Dilemma: Will a 25 bps Reduction Steady Inflation?

The Reserve Bank of India's Monetary Policy Committee (MPC) is poised to potentially announce a 25 basis points (bps) rate cut in its upcoming September policy meeting. This move is deemed the most viable option, according to a report by the State Bank of India (SBI), which argues that the current economic climate supports such a decision.

The SBI report emphasizes the importance of adopting a 25 bps rate cut in September, particularly as inflation remains within controlled levels and forecasts indicate further moderation. "In the midst of financial chaos, central banks' communication, free from noise, is an essential policy tool," the report states, cautioning against a no-change stance that would constitute a policy error.

Despite no alterations in the Goods and Services Tax (GST), inflation is tracking at under 2 percent for September and October. Future Consumer Price Index (CPI) estimates for FY27 hover around 4 percent, with further reductions anticipated due to GST rationalization. Projections suggest CPI could decline to 1.1 percent in October, marking a significant low.

The MPC is set to convene on September 29 and 30, with an official policy announcement expected on October 1, 2025. SBI warns that failure to cut rates would be akin to repeating past mistakes of maintaining a neutral stance when conditions are favorable for a reduction.

Additionally, SBI highlights that CPI inflation might still have room to decrease by 65-75 bps due to potential GST adjustments. Historical data, such as the tax rate cuts in 2019, support this outlook as similar actions then led to notable reductions in inflation. With CPI revisions and GST changes, inflation is anticipated to remain at the lower spectrum of the 4 percent target band through FY26 and FY27.

(With inputs from agencies.)