RBI Governor says GST 2.0 to have ‘sobering impact’ on inflation. Here’s why

About 11.4 per cent of the CPI basket would be impacted by the recent changes, with the magnitude varying significantly across product groups, the RBI said separately in its Monetary Policy Report for October, which was also released on Wednesday. The overall impact of GST changes on CPI-based retail inflation is conditional on the extent of the pass-through, which is likely to remain partial on account of offsetting changes in input tax credit and compensation cess, as well as various forms of price rigidities.

The pass-through of the tax rate cut benefits under GST 2.0 is already being closely eyed by policymakers. The government is keeping a close watch on the price movements for common-use items to ensure that the benefits are passed on to the consumers. E-commerce platform operators such as Flipkart, Amazon, Blinkit and Zepto are also under the scanner of the government for hiking prices of certain items despite sweeping rate cuts under GST 2.0, an official had said on Tuesday (September 30).

The price cuts following the tax reduction under GST 2.0 are seen moderating retail inflation. While the RBI’s Monetary Policy Committee (MPC) maintained the status quo on the repo rate in its monetary policy review on Wednesday, it cut the FY26 inflation projection to 2.6 per cent from 3.1 per cent earlier and raised the FY26 growth projection to 6.8 per cent from 6.5 per cent.

“There has been a considerable moderation in headline inflation. The rationalisation of the goods and services tax rates is likely to have a sobering impact on inflation while stimulating consumption and growth,” Malhotra said.

Inflation outlook

The MPC observed that the overall inflation outlook has turned even more benign in the last few months due to a sharp decline in food prices and the rationalisation of GST rates. The “salubrious impact” of recent GST reforms will also support growth further, along with other factors such as a favourable monsoon, lower inflation, and monetary easing, the RBI Governor said.

“Looking ahead, an above normal monsoon, good progress of kharif sowing and adequate reservoir levels have further brightened prospects of agriculture and rural demand. Buoyancy in the services sector, coupled with steady employment conditions, is supportive of demand, which is expected to get a further boost from the rationalisation of GST. Rising capacity utilisation, conducive financial conditions, and improving domestic demand should continue to facilitate fixed investment,” he said.

While the RBI flagged the risks on the external front by stating that the tariffs will moderate exports, it said the implementation of several growth-inducing structural reforms, including streamlining of GST, is expected to offset some of the adverse effects of the external headwinds.

Surge likely in Q4

However, inflation is expected to gradually pick up from the January-March quarter of the ongoing financial year 2025-26 on unfavourable base effect, despite the moderating impact of GST rationalisation, the RBI’s Monetary Policy Report for October, also released on Wednesday, said.

“Looking ahead, the inflation outlook will depend upon several factors, both global and domestic. Assuming a normal monsoon and a sustained reduction in food inflation, the quarterly CPI inflation forecasts for 2025-26 have been adjusted downward in RBI staff projections. Nevertheless, inflation is expected to rise from the final quarter of this financial year, yet the recent GST rationalization, among other favourable factors, will help keep overall inflation low during 2025-26,” the report stated.