|
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) may announce a 25 basis points (bps) cut in its September policy meeting as it is the best possible option at this stage, according to a report by State Bank of India (SBI).
The report highlighted that there is both merit and rationale in going for a rate cut in September, as inflation remains under control and the outlook suggests further moderation. It stated, "Central Banks' communication sans cacophony, is a policy tool unto itself amidst all the chaos. No point in committing a Type 2 error (No rate cut with Neutral Stance) in September also. A 25 bps rate cut in September is the best possible option for RBI." The SBI report highlighted that post-June, the bar for rate cuts has become higher, and any such decision will require calibrated communication by the central bank. However, it emphasized that inflation is expected to remain benign even in FY27. Without any Goods and Services Tax (GST) cut, inflation is already tracking below 2 per cent in September and October. CPI numbers for FY27 are now estimated to track around 4 per cent or less. With GST rationalization, October CPI could fall closer to 1.1 per cent, which would be the lowest since 2004. The MPC is scheduled to meet on September 29 and 30, with the policy announcement slated for October 1, 2025. The report cautioned that not going for a rate cut could mean repeating the same Type 2 error made earlier, i.e., maintaining a neutral stance despite favorable conditions. SBI also noted that the bottom of CPI inflation may not yet have been reached and could further decline by 65-75 bps due to the expected GST rationalization. It pointed out that the experience of 2019 also showed that rationalization of rates, particularly reducing rates for common goods from 28 per cent to 18 per cent, had led to almost a 35 bps decline in overall inflation within a couple of months. In addition, with the new CPI series, SBI expects a further moderation of 20-30 bps in inflation. Taken together, factors like GST rationalization and base revision indicate that CPI inflation will remain at the lower end of the inflation target band of 4 per cent plus-minus 2 per cent for the entire FY26 and FY27. (ANI)
|
