Proposed GST reforms by govt may cool inflation, open door for RBI rate easing: Experts

Reserve Bank of India

The next generation GST reforms announced by the Prime Minister Narendra Modi in his 79th Independence Day address, which is expected to rolled by Diwali this year, could soften inflation, ease fiscal pressure in the near term, and increase the likelihood of a repo rate cut by the Reserve Bank of India (RBI) as early as October, economists and brokerages said.

They added that lower indirect taxes on consumer goods could push Consumer Price Index (CPI) inflation down by 40-80 basis points (bps), and boost consumption, especially for the consumer durables.

Experts said that the potential price relief could offer a positive support to consumption in H2FY26, particularly ahead of the festive season, when demand typically surges.

Morgan Stanley report pegged CPI inflation to lower around 40 bps over the coming quarters.

Similarly, Gaura Sengupta, economist at IDFC First Bank said the reduction in GST rate, 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.”

“Downward impact on CPI inflation is expected for both food (processed food items) and core inflation. Overall impact is estimated at 0.6 to 0.8 percentage points depending on how much of the cuts are passed on,” Sengupta added.

The Centre has proposed to "essentially move towards simple tax" with 2 slabs—"standard and merit", with special rates applicable for only for select few items, the finance ministry on August 15.

In a statement issued after the PM’s address, the ministry said that the central government has sent its proposal on GST rate rationalisation and reforms — specifically linked to structural reforms, rate rationalisation, and ease of living — to the Group of Ministers (GoM) constituted by the GST Council to examine this issue.

In his address, Modi announced that the government will roll out next-generation reforms to the GST by Diwali, including a major reduction in tax rates. Addressing the nation from the Red Fort on the 79th Independence Day, the Prime Minister described the upcoming changes as a “Diwali gift” aimed at easing the tax burden on citizens.

“This Diwali, I am going to make it a double Diwali for you. Over the past eight years, we have undertaken a major reform in GST. Now, we are bringing next-generation GST reforms. This will reduce the tax burden across the country,” Modi said.

The further expectation of the easing inflation comes at a time when the RBI also projected CPI inflation for FY26 to 3.1 percent in August monetary policy from 3.7 percent in June policy, on easing food prices and a benign outlook.

India’s retail inflation eased to an eight-year low of 1.55 percent in July, down from 2.1 percent in June, according to official data released on August 12. This is the first time since January 2019 that retail inflation has fallen below the 2 percent mark.

The moderation in retail inflation extends a six-month streak of sub-4 percent inflation, with the average since April holding below 3 percent.

“Over the next 12 months the 25-50bps inflation impact is possible. Yet final contours of GST rate cuts need close watch. Even before the GST rate cut announcement we were penciling in token 25bps rate cut as the final leg of monetary policy easing cycle,” said Kanika Pasricha, Chief Economic Advisor at Union Bank of India.

Further, experts said that a moderation in inflation would give the RBI more flexibility to pivot toward growth-supportive policy.

“A GST rate cut would lower inflationary pressures and likely increase the probability of further monetary easing by the RBI. We see space for the terminal repo rate to fall to the 5.0–5.25 percent range,” UBS economists wrote in a recent note.

Sengupta stated that for RBI, they will get comfort on both inflation and growth. "GST is expected to lower inflation pressures marginally and support growth. We hold on to our expectation for a rate cut in October, which was there even before the GST cut," Sengupta added.