GST reforms and inflation: Will Modi government’s move pave the way for an RBI rate cut?

On August 15, Prime Minister Narendra Modi announced a major Diwali gift for Indian consumers that could potentially revive sluggish consumption trends, ease inflationary pressures, and pave the way for further rate cuts by the Reserve Bank of India (RBI).

Announcing the GST reforms in his Independence Day speech, the PM said next-generation reforms will be introduced under the GST framework.

"This Diwali, these GST reforms will bring a double bonus to the people," said the PM.

GST reforms: A potential game-changer

After the income tax relief announced in Budget 2025, the long-awaited GST reforms are expected to further lift the disposable incomes of Indian consumers. Experts believe the move will provide a strong boost to consumption and act as a major positive for the Indian economy.

"The announcement of GST reforms is perhaps the most promising development. While monsoons have been favourable for three consecutive years, discretionary spending has not picked up to the extent seen in earlier periods of good rainfall. The proposed GST reform is a long-awaited move and could be a game-changer, as it would boost disposable incomes, thereby driving corporate earnings growth," said G Chokkalingam, the founder and head of research at Equinomics Research Private Limited.

The proposal for a broad two-slab GST structure of 5 per cent and 18 per cent will simplify the GST regime, improve compliance, and, importantly, lower the prices of a range of goods and services.

According to VK Vijayakumar, Chief Investment Strategist at Geojit Investments, this overhaul of the GST system, along with the new income tax regime, drastically changes India’s tax system.

"This is, indeed, a game-changing tax reform with significant positive consequences for the economy. This fiscal reform, along with the bold monetary stimulus being provided by the MPC, sets the stage for demand revival and growth boost to the economy," said Vijayakumar.

GST reforms: Will it cool inflation?

The proposed reforms will likely lower indirect taxation on goods and services, which could further soften inflationary pressure. However, the impact of these reforms needs to be seen in the context of government revenue.

According to Sujan Hajra, chief economist and executive director at Anand Rathi Group, a portion of the GST rate reduction should be passed on to consumers, thereby helping soften retail inflation. However, the overall impact depends on revenue implications for the government.

If reforms reduce revenue, Hajra said a lower tax collection would widen the fiscal deficit, which in turn could put upward pressure on retail inflation over time.

If reforms are revenue-neutral, the creation of a new 40 per cent slab for sin goods and luxury consumption (in lieu of the existing GST cess) would offset the revenue loss from lowering rates elsewhere, said Hajra.

In that case, the reform would essentially redistribute the indirect tax burden across consumer classes (as the cess was slated to expire from April 2026) rather than reduce it overall.

Madhavi Arora, Lead Economist at Emkay Global Financial Services, believes CPI inflation could ease by nearly 50-60bps over a one-year period, depending on the pass-through. This decline in inflation would largely come from certain goods in the food and beverages (F&B) category moving to the 5 per cent slab from 12 per cent currently.

However, Arora highlighted that the impending change in the CPI basket, likely from February 2026 onwards, is likely to reduce the weight of F&B in the basket, which may mitigate some of this impact.

Can the RBI cut rates?

If inflation eases further, the RBI will likely shift its focus to support growth. In that case, it may go for further rate cuts.

Chokkalingam believes the RBI may cut rates in its upcoming policy meeting, which would act as another significant tailwind for the markets.

Hajra believes even without factoring in GST restructuring, there already exists space for the Reserve Bank of India (RBI) to cut policy rates by 25–75 basis points, depending on the trajectory of future inflation.

"Since the likely effect is either modestly disinflationary or broadly revenue-neutral, GST restructuring does not provide any significant additional headroom for monetary policy easing," Hajra said.

According to Ajit Mishra, SVP of research at Religare Broking, GST reforms will certainly have a disinflationary effect, but the broader impact on the economy is likely to unfold over the next few months to a few quarters.

Hence, attributing an immediate RBI rate cut solely to GST reforms may be a bit stretched.

"If the RBI senses growth is falling short of its expectations, it could act preemptively, irrespective of the GST timeline," said Mishra.

"A rate cut driven directly by GST reforms looks less likely. That said, these reforms, alongside supportive policy measures by both the government and the central bank, should improve growth prospects and lift investment sentiment," Mishra said.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.