Will GST rationalisation help check retail inflation?

Since the GST rate of essential items has declined from 12 per cent to 5 per cent/NIL and which comes into effect from September 22, the CPI or retail inflation in this category may also come down by 25-30 bps in the current fiscal after considering a 60 per cent pass through effect on food items.

Apart from it, the rationalisation of the GST rates of services should also lead to another 40-45 bps reduction in CPI inflation on other goods and service items, considering a 50 per cent pass through effect. Overall, Ecowrap believes CPI inflation may be moderated in the range of 65-75 bps over next fiscal.

With August inflation print a tad higher that the 2 per cent mark, a rate cut in October looks onerous.

Even a rate cut in December looks a little difficult if growth numbers for Q1 and Q2 are taken into consideration.

Looking ahead, despite the healthy trends in the Kharif sowing, large excess rains, and flooding in some parts of the country in late August and early-September could impact the Kharif crop yields, and consequently output and prices, and thus, remain a key monitorable.

Thus, October may see headline CPI going even sub-1 per cent, led by GST cuts and a favourable base effect.

While GST-led lower tax incidence may not be the perfect rationale for the RBI to reassess its policy stance, Emkay believes that a multitude of factors could still lead to a change in the RBI’s reaction function.

Moreover, experts re-assert that the RBI’s focus on one-year ahead expected inflation appears misplaced in an evolving world – especially as the global landscape continues to shift toward a disinflationary bias in Asia.

However, another section of analysts think otherwise. They believe that with the implementation of GST rate cuts, the impact of the same on the CPI inflation is unlikely to be material in the ongoing month, given that the average monthly prices are used for computation of the price indices.

Overall, the analysts expect the headline CPI inflation to print at 2.0 per cent in September.

The dip in the average monthly prices owing to the GST cut will start to be visible in the October data, which along with a high base, is likely to soften the inflation print for the month to 1.5 per cent.

In Icra’s view, the GST rejig could dampen the headline CPI prints by 25-50 bps during Q3 relative to its pre-GST rationalisation estimates, taking the average for FY26 to 2.6 per cent.

While the average CPI inflation for FY26 is now likely to print around 2.6 per cent, and October-November may mark a fresh low, the trajectory subsequently remains upward sloping.

This, in conjunction with the stronger-than-expected GDP growth in Q1, and the positive impact of the GST reforms on growth in the later quarters, suggest a status quo for the repo rate in the October policy review.