New Delhi: A recent study by the State Bank of India (SBI) has recommended that the Reserve Bank of India (RBI) consider a 25 basis points (bps) reduction in the key benchmark lending rate in its forthcoming monetary policy. The recommendation comes amid expectations of continued benign retail inflation into the next financial year.

Since February, the RBI has already reduced the repo rate by 100 bps as consumer price index (CPI)-based inflation has moderated.

Following three consecutive rate cuts, the central bank paused in August. The Monetary Policy Committee (MPC), headed by the RBI Governor, is scheduled to meet on September 29 for a three-day review, with the policy decision set to be announced on October 1.

The SBI report, titled Prelude to MPC Meeting, noted that while central bank communication has been crucial in shaping market expectations and yields post-June, there is strong merit in implementing a September rate cut.

The report emphasised that failing to cut rates could be a “Type 2 error,” as inflation is projected to remain below the RBI’s target range, with CPI expected to hover around 4% or less for FY26-27. With GST rationalisation, October CPI could dip as low as 1.1%, the lowest since 2004.

Authored by Soumya Kanti Ghosh, SBI’s Group Chief Economic Advisor, the study highlighted that past experiences, such as the 2019 GST-driven rate rationalisation, led to a rapid 35 bps decline in inflation. The report further projected an additional moderation of 20-30 bps in CPI due to the new CPI series and other structural factors.

The study concluded that a 25 bps rate cut in September would be the “best possible option” for the RBI, reinforcing its role as a forward-looking central bank, while ensuring compliance with the government-mandated CPI target of 4%, with a 2% margin on either side.