Impact of GST Cut on Inflation

The cut in goods and services tax (GST) is expected to have a favourable impact on the consumer price index (CPI)-based inflation prints. According to ICRA Ratings, this impact will be visible until the second quarter (Q2) of fiscal 2026-27 (FY27).

Monetary Policy and Rate Cuts

The Reserve Bank of India’s (RBI) latest monetary policy document had a benign tone, indicating that the rate cut cycle may have come to an end. ICRA Ratings expects that any further rate easing would only be likely if there is a significant decline in growth outcomes, leading to a cut in growth projections.

RBI’s Monetary Policy Committee (MPC) Decision

In December, the RBI’s MPC eased the repo rate by 25 basis points (bps) to 5.25 per cent. This decision was made despite the dovish policy tone, which suggests that the central bank is taking a cautious approach to monetary policy.

Inflation Projections

ICRA views the downward revision in the MPC’s quarterly CPI inflation projections as largely expected. However, the decline in inflation in October 2025 was partly due to tax policy changes, specifically the GST rate cuts across several items in the CPI basket. This led to a cooling in the core CPI excluding gold in that month.

Conclusion

In conclusion, the cut in GST is expected to have a positive impact on inflation, at least until Q2 FY27. While the RBI’s monetary policy document had a benign tone, ICRA Ratings believes that the rate cut cycle may have come to an end. Any further rate easing will depend on significant declines in growth outcomes. The impact of GST cuts on inflation will be closely watched in the coming months to determine the next course of action for monetary policy.