GST rate cut may ease CPI inflation by 25bps; 40bps dent on fiscal deficit

The goods and services tax (GST) rates rejig effective September 22, 2025 is likely to bring down consumer price index (CPI) inflation by 25 basis points (bps), suggest analysts. On its part, the government pegs the tax collection dent at Rs 48,000 crore as a result of the slab recast, which analysts believe can be absorbed well if the rate rejig triggers an increase in overall demand.

 

Here's how analysts leading brokerages assess the impact of the GST rate rejig on the Indian economy, bond markets and the possibility of an aggressive interest rate cut by the Reserve Bank of India (RBI) in the months ahead.

 

 

Bernstein

 

Our calculations suggest the net impact on the central government’s fiscal deficit, assuming no capex adjustments would be close to 20 basis points. If capex is reduced by 5 per cent, the impact moderates to about 5 basis points (bps). 

 

In a more conservative scenario, where the Centre absorbs the full revenue loss (including that of the states) without any capex cuts, the headline impact on the fiscal deficit could widen to around 40 bps. Actual impact will be lower than that given its applicability to only half of the year and in practical terms, however, some capex rationalisation is likely. 

 

 

Jefferies

 

Based on fiscal 2023-24 (FY24) consumption pattern, the Govt expects Rs 48,000 crore tax collection impact due to these tax cuts. Impact on FY26 fiscal, we estimate, to be Rs 22,000-24,000 crore in total (State and Centre put together for the 7-month impact for FY26), as demand buoyancy should lower the impact. 

 

We do not expect FY27 to show any negative impact on fiscal, as conversion of "GST Cess" into "GST" should offset the impact. These GST cuts should help CPI inflation by around 25bps, increasing the probability of a 25bps rate cut in the upcoming meeting. An outside chance of 50bps cut also remains. 

HSBC

 

If we add on the benefits from the income tax cut earlier this year and a lower debt servicing burden due to repo rate cuts, the overall boost to consumption can be 0.6 per cent of GDP. Of course, a part of this could be saved instead of spent, lowering the net boost.

 

We estimate that the tax rate cuts can lower headline CPI inflation by around 1 ppt if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5ppt. We expect the RBI to cut rates once again by 25bp in 4Q25, taking the repo rate to 5.25 per cent.

 

ICRA

 

The GST rationalisation is a welcome and well-timed move and its positive implications for consumer demand and producer sentiment will help to offset a portion of the negative impact of the evolving US tariffs and penalties on Indian GDP (gross domestic product) growth. Any revenue foregone by the Centre and the States would effectively have to be made up through other revenue streams, or expenditure rationalisation. 

 

Private sector capex decisions may get a boost for domestic consumption-oriented sectors. As of now, the Reserve bank of India (RBI) may choose to retain its growth forecast for India's FY26 GDP at 6.5 per cent, unless there is a thawing in the tariff/penalty situation later this month.

 

UTI AMC

 

From a market perspective, the implications for bonds should remain limited, as the estimated revenue loss of Rs 48,000 crore for FY26 can be comfortably absorbed within the existing budgetary expenditure. The disinflationary impact of GST cuts bodes well for monetary policy and allows RBI to keep rates lower for an extended period.