An interest rate reduction of 25 basic points (BPS) is the best possible option for RBI in the coming bi -monthly monetary policy evaluation in October, but this requires calibrated communication from the Central Bank as a post June, the bar for lowering the rate is indeed higher, according to the economic research department of SBI.
“There is a merit and reason to go a rate reduction in September … But it makes no sense to commit a type 2 error again (no rate reduction with a neutral position) by not reducing the rates in September, because inflation even remains benign in FY27 and without a GST section, it follows below 2 percent in September and October.
“CPI FY27 numbers now follow ~ 4 percent or less, with GST rationalization, October CPI can be closer to 1.1 percent … The lowest since 2004,” said Economists in a report.
They believe that the bottom of CPI inflation may not have been reached yet, and it can continue to fall with 65-75 BPS due to the enormous GST rationalization.
The experience of 2019 also indicates that the rationalization of the rates (mainly aimed at reducing the rates for common goods to 18 percent of 28 percent) led to a decrease in the total inflation of almost 35 pps in just a few months.
Moreover, with a new CPI series they expect further moderation of 20-30 BPS in CPI. All these factors (GST, base overhaul) indicate that the CPI inflation around the lower end of the inflation goal (4 +/- 2%) remains for full FY26 and FY27.
Inflation is ready to fall into a historic low point since 2004 with GST rationalization, according to the report.
The economists noted that although the September policy is too close to call, a rate reduction is the best possible option in view of the benign inflation process. This will also project RBI as a future -oriented central bank, they added.
Referring to the status quo on rates, along with a change in posture in accommodation of neutral as the second best option, the report said that this still keeps the space for the rate reduction open.
In the event that the status quo and the netural attitude continue, they believed that it will be an opportunity that has been lost from now on. The rate setting of the Central Bank Monetary Policy Committee has reduced its policy repo rate with a cumulative 100 basic points since February from 6.50 percent to 5.50 percent.
Published on September 22, 2025
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