New Delhi: A SBI study released on Monday stated that there is merit and rationale for the Reserve Bank to reduce the key benchmark lending rate by 25 basis points in the forthcoming monetary policy, as retail inflation is expected to remain benign even in the next financial year.
The Reserve Bank of India (RBI) has already reduced the repo rate by 100 basis points since February, amidst declining consumer price index (CPI) based inflation. After reducing the repo rate three times in a row, the RBI hit a pause button in August.
The Reserve Bank Governor-headed Monetary Policy Committee (MPC), which decides on the interest rate, is scheduled to meet on September 29 for a three-day deliberation. The decision will be announced on October 1.
"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," said 'Prelude to MPC Meeting', the research report from the State Bank of India's Economic Research Department.
It further said central bank communication is a crucial toolkit for monetary policy, and post-June policy, such communication has played a major role in yields hardening.
"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 per cent in September and October," it said.
The report said the CPI for fiscal 2026-27 numbers are now tracking around 4 per cent or less, with GST rationalisation, October CPI could be closer to 1.1 per cent, the lowest since 2004.
"A rate cut in September is the best possible option for RBI, which also projects it as a forward-looking central bank,' the SBI study said.
The report, authored by Soumya Kanti Ghosh, Group Chief Economic Advisor of SBI, expects the CPI inflation may further decline by 65-75 bps due to the huge GST rationalisation.
Experience of 2019 also indicates 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 a couple of months, it said.
"Additionally, with the 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 for the entire FY26 and FY27," it said.
The government has mandated the RBI to ensure the CPI remains at 4 per cent with a margin of 2 per cent on either side.
(Except for the headline, this article has not been edited by FPJ's editorial team and is auto-generated from an agency feed.)
