GST reforms expected to lower inflation, create room for rate cut

The rate rationalisation of goods and services tax (GST) is expected to soften prices, potentially creating room for a rate cut by the Reserve Bank of India's Monetary Policy Committee (MPC), according to economists.

- ANJALI KUMARI & MANOJIT SAHA

They said if the consumer got the full benefit of the cuts, retail prices could fall between 60 and 80 basis points (bps) over 12 months.

During the August review of the monetary policy, the central bank projected an average inflation rate of 4.4 per cent during January-March 2025-26 while for the first quarter of next financial year, it was estimated at 4.9 per cent. Since the inflation rate is seen to be inching up from January, it is felt there is limited room for a rate cut.

"As most of the GST cut is applicable to consumer non-durables, which have a higher weight in the consumer price index, the impact on the headline inflation rate could be as large as 60-65 bps on an annual basis," said Anubhuti Sahay, head (India, economics research), Standard Chartered Bank.