What You Need to Know, ETCFO
The proposed overhaul of the Goods and Services Tax (GST) regime, reducing the number of slabs to just two primary rates, could ease inflationary pressures and open the door for the Reserve Bank of India to cut policy rates further in the coming quarters. Analysts suggest that the move may create the conditions for a 25-50 basis point reduction in the repo rate, supporting growth momentum through FY26.
The government’s plan to rationalise the GST structure from the current five slabs to a simplified 5 per cent and 18 per cent, alongside a demerit rate on luxury items, is widely expected to have a deflationary effect on the economy.
Lower prices at the point of purchase are likely to boost household consumption at a time when the economy is already benefiting from softer inflation, income tax relief, and stronger credit flows.
The RBI’s monetary policy committee has already delivered 100 basis points of front-loaded cuts this calendar year, bringing the repo rate down to 5.50 per cent.
With inflation currently benign and the central bank working with a neutral policy rate assumption, experts believe there is space for the terminal repo rate to move further down towards 5.0–5.25 per cent.
The risks
However, the reforms carry fiscal implications. A potential revenue loss of nearly 0.3 per cent of GDP, or about Rs 1.1 lakh crore annually, raises concerns of a wider deficit and higher government borrowing.
For households, cheaper mass-market and aspirational goods, coupled with a simpler tax structure, could provide tangible relief at the checkout counter, just in time for the festive season in October 2025.
Bond markets are wary of this risk. Still, surplus cess collections and higher-than-budgeted transfers from the RBI are expected to provide a cushion, reducing immediate fiscal pressures.
Overall, the GST reforms are being viewed as a macroeconomic policy lever that combines near-term relief for households with long-term efficiency gains. By making consumption more affordable while ensuring fiscal buffers remain intact, the reform could give the central bank the space it needs to continue easing monetary policy, further strengthening the growth outlook.
