RBI could introduce another 25 bps rate cut on October 1 on benign retail inflation: SBI study

The Reserve Bank of India (RBI) could announce another repo rate cut in the upcoming Monetary Policy Committee (MPC) meeting, the State Bank of India (SBI) said in its research report. 

The RBI’s MPC is scheduled to meet on September 29 for a three-day deliberation on the country’s monetary policy. The decision will be announced on October 1.

A study released by the SBI’s Economic Research Department on Monday said that there is merit and rationale for the RBI to cut the key interest rate (repo) by 25 basis points (bps) in the forthcoming monetary policy, considering that the retail inflation is expected to remain moderate even in the next financial year. 

"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 rate cut is indeed higher," said 'Prelude to MPC Meeting', the research report from the State Bank of India's Economic Research Department.

Prelude to MPC Meeting: Key highlights

The central bank communication is a crucial toolkit for monetary policy, and post-June policy, such communication has played a major role in yields hardening, it added. 

"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 Consumer Price Index (CPI) for the next fiscal year (2026-27) is forecasted to be around 4% or less, and the October CPI, with GST rationalisation, could be near 1.1%, the lowest since 2004, the report said. 

"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 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, 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 the lower end of the inflation target for the entire FY26 and FY27," it said.

The central government has mandated the RBI to ensure the CPI remains at 4% with a margin of 2% on either side.