MUMBAI: There is more than enough merit and rationale for the Reserve Bank to reduce the key benchmark lending rate by 25 bps in the forthcoming monetary policy review, says SBI Research. This comes after the steep fall in retail inflation that’s expected to remain benign even in the next financial year and the hardening of bond yields since the June rate cut.
The Reserve Bank has already delivered 100 bps repo rate cuts in three installments between February and June when it surprised with an unconventional 50 bps repo cut. But the monetary authority in June also changed the policy stance to neutral, spooking the bonds market which saw a steep hardening in the yields. The RBI also hit a pause button in August, which further led to the rise in bond yields.
The Reserve Bank-led Monetary Policy Committee (MPC) is meeting from 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 require calibrated communication by the RBI as post-June, the bar for a rate cut is indeed higher," said SBI Research in a note on Monday.
Its chief economist Soumya Kanti Ghosh further said the central bank communication is a crucial toolkit for monetary policy and has played a major role in the bond 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’s tracking below 2% in September and October, when it is likely to be printing in at 1.1%," he said.
Ghosh said the CPI for fiscals 2026-27 are now tracking around 4% or less. With the GST rationalisation, October CPI could be closer to 1.1%, the lowest since 2004. CPI inflation may further decline by 65-75 bps due to the huge GST rate cuts, he added.
"A rate cut in September is the best possible option for the RBI, which also projects itself as a forward-looking central bank,” he said.
The experience of 2019 also indicates that the rate rationalisation (primarily focused on reducing rates for common goods to 18% from 28%) led to almost 35 bps decline in overall inflation in just a couple of months, he said.
"Additionally, with the new CPI series, we expect further moderation of 20-30 bps. All these factors (GST and base revision) indicate that CPI will remain around the lower end of the inflation target for FY26 and FY27," it said.
The government has mandated the RBI to ensure the CPI remains at 4% with a margin of 2% on either side.