RBI may cut repo rate by 25 bps in September; SBI calls it ‘the best possible option’
The RBI's Monetary Policy Committee may cut rates by 25 basis points in September, as inflation is under control. A State Bank of India report suggests this is the best option to avoid previous errors and project CPI inflation below 4 per cent for FY26 and FY27.
The Reserve Bank of India (RBI) may announce a 25-basis-point (bps) repo rate cut in its September monetary policy meeting as it is the best possible option at this stage, according to a report by the State Bank of India (SBI).
In the previous monetary policy meeting held between April 7 and April 9 2025, the RBI cut the repo rate by 25 basis points, from 6.25 per cent to 6 per cent. The next monetary policy meeting is scheduled for September 29 to September 30, with the policy announcement slated for October 1, 2025.
Why is a rate cut recommended?
The SBI report suggests that there is strong merit and rationale for the RBI to cut rates in September. Inflation is currently under control and the outlook suggests further moderation, reported ANI.
“Central Banks' communication sans cacophony is a policy tool unto itself amidst all the chaos. No point in committing a Type 2 error in September, also. A 25 bps rate cut in September is the best possible option for RBI,” it stated. Type 2 error refers to making a decision to maintain a neutral stance despite favourable economic conditions.
Inflation outlook
The report emphasised 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.
The Consumer Price Index (CPI) numbers for FY27 are estimated to be around 4 per cent or less. With GST rationalisation, October CPI could drop to about 1.1 per cent, which would be the lowest since 2004.
The report 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 rationalisation.
What will happen if the RBI decide against a rate cut?
SBI further stressed that not going for a rate cut could mean repeating the same Type 2 error made earlier, which means maintaining a neutral stance despite favourable conditions. It views calibrated communication from the central bank as a crucial policy tool.
It noted that the experience of 2019 also showed that rationalising rate, particularly cutting GST on common goods from 28 per cent to 18 per cent, led to an almost 35 bps decline in overall inflation within just a couple of months.
In addition, with the new CPI series, SBI expects a further moderation of 20-30 bps in inflation. Coupled with factors like GST rationalisation and base revision, CPI inflation will remain at the lower end of the inflation target band of 4 per cent plus or minus 2 per cent for the entire FY26 and FY27, ANI reported.