The Reserve Bank of India (RBI) is scheduled to announce its next bi-monthly monetary policy on October 1st. Just ahead of this important announcement, a research report by the State Bank of India (SBI) has made a bold prediction that the Reserve Bank may cut interest rates by 25 basis points (0.25%). The report convincingly argues that retail inflation will remain under control in the future, making this move extremely beneficial for the economy.
RBI Meeting and Deep Impact on the Current Economic Situation
The Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, will meet for three days starting Monday. This meeting is taking place amid serious global developments, such as rising international geopolitical tensions and the US imposing a 50% tariff on Indian exports. The final decision will be announced on October 1st. It’s worth noting that since February, the RBI had cut interest rates by 100 basis points in three stages, but in the August meeting, no changes were made, adopting a “wait and watch” strategy.
GST Changes Bring Major Relief and Expectations of Rate Cuts
Effective September 22nd, the GST (Goods and Services Tax) structure has been two-tiered, meaning only 5% and 18% rates are now applicable. This simplified structure combines the previous rates of 5%, 12%, 18%, and 28%. This revolutionary change has made 99% of everyday items cheaper and is expected to play a key role in controlling inflation.
CRISIL Chief Economist Dharmakirti Joshi also agrees. He says inflation is lower than expected, and core inflation is historically low. Changes in GST rates will further reduce inflation. Furthermore, the recent 25 basis point rate cut by the US Federal Reserve and the possibility of further rate cuts have provided the RBI with policy flexibility.
Expert Opinion
Not in favor of a rate cut
Madan Sabnavis, Chief Economist at Bank of Baroda, believes that a rate cut is not necessary, as inflation is already below the 4% target and economic growth is projected to remain above 6.5%. Meanwhile, Aditi Nayar, Chief Economist at ICRA, estimates that a Status Quo (no change) policy is likely in the October policy, as the GST rationalization may reduce inflation in October-November, but it could rise again later.
A “Wait and Watch” Strategy
Mandar Pitale of SBM Bank India also believes that the RBI will maintain the status quo for now and take further action based on the situation at the December meeting.
Amid all this data and expert opinion, the GST changes and global rate cuts have given the RBI tremendous flexibility to cut rates. The biggest question now is whether the RBI Governor will prioritize domestic growth over international pressure and what unprecedented decision he will make on October 1st.