Prime Minister Narendra Modi’s promise of the overhaul of the goods and services tax (GST) regime bolsters the case of an interest rate cut by the Reserve Bank of India (RBI) as early as October, economists and brokerages have said.
In his Independence Day address, Modi said the GST 2.0 would include a major reduction in tax rates, describing the proposed changes as a “Diwali gift” that will ease citizens’ tax burden.
The proposed GST reforms could cool inflation further, allowing the RBI to ease monetary policy without compromising price stability, economists said.
“We expect one more rate cut by the RBI, likely in the October policy,” Morgan Stanley said in a note.
UBS also expects further easing, estimating room for the terminal repo rate to fall in the 5–5.25 percent range. “We maintain our view that there is space for 25–50 basis points (bps) rate cut in rest of FY26 to support growth,” the brokerage said.
The central bank has brought down the repo rate by 100 basis points since February before hitting pause in August review. The monetary policy committee’s next review is due in October.
The Centre has proposed to "essentially move towards simple tax" with two slabs —"standard and merit", with special rates applicable for only for select few items, the finance ministry has said.
In a statement issued after the PM’s address, the ministry said the Centre has sent its proposal on GST rate rationalisation and reforms to the group of ministers (GoM) constituted by the GST Council.
Kanika Pasricha, Chief Economist at Union Bank of India, said they were expecting a final 25 bps rate cut. “Even before the GST rate cut announcement, we were pencilling in a token 25 bps rate cut as the final leg of the monetary policy easing cycle.”
Headline inflation has remained below the RBI’s 4 percent target in recent months, and economists estimate the GST-related changes to lower it further by 40–80 bps over the next year, depending on the extent of pass-through to consumers.
Morgan Stanley expects a 40 bps drop in prices over the coming quarters.
Gaura Sengupta, economist at IDFC First Bank, said the reduction in GST, if implemented by October, is expected to boost consumption, especially in consumer durables. “We estimate impact on nominal GDP of 0.6 percent over 12 months,” she said.
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