The impact of the Goods and Services Tax (GST) on the Indian economy continues to unfold, and recent analysis from SBI Research suggests a notable, though perhaps underestimated, effect on CPI inflation. Initial projections of an 85 basis point reduction have been revised downwards to 25 basis points for the September-November 2025 period, with expectations of further decline to 35 basis points throughout 2025-26. This article delves into the details of this assessment, exploring the factors influencing these figures and the broader outlook for inflation in India.
GST Rationalisation and its Impact on CPI Inflation
SBI Research’s latest report highlights a direct correlation between GST rate rationalisation and a decrease in the Consumer Price Index (CPI). The initial estimate of 85 basis points was based on broader economic modelling. However, a more granular, item-by-item analysis revealed a more modest initial impact of 25 basis points between September and November 2025.
This doesn’t necessarily negate the positive influence of GST. The report suggests that the full extent of the reduction isn’t yet reflected in the data. Specifically, it points to the potential for increased discounts during e-commerce sales, spurred by the lower tax burden under the revised GST structure. These discounts, if substantial, could push the total reduction in CPI inflation to 35 basis points for the fiscal year 2025-26.
Understanding Basis Points
For readers unfamiliar with economic terminology, a basis point is one-hundredth of a percentage point. Therefore, 25 basis points equate to a 0.25% reduction, and 35 basis points represent a 0.35% decrease. While seemingly small, these reductions can have a cumulative and significant effect on household budgets and overall economic stability.
Regional Variations in Inflation: The Case of Kerala
While the national trend shows a moderating effect from GST, regional variations in inflation are prominent. November 2025 data reveals that Kerala experienced a significantly higher inflation rate of 8.27%, with a stark difference between rural (9.34%) and urban (6.33%) areas.
This surge in Kerala’s inflation is attributed to a sharp increase in the prices of commodities heavily consumed within the state, namely gold, silver, and edible oils & fats. These items aren’t as directly impacted by GST rationalisation, highlighting how state-specific consumption patterns can override national trends. This underscores the importance of considering regional nuances when analyzing overall retail inflation in India.
The Rupee Depreciation and Future Inflation Projections
Despite the downward pressure on prices from GST, other macroeconomic factors are expected to contribute to rising inflation in the coming months. The recent depreciation of the Indian Rupee is a key concern. A weaker rupee makes imports more expensive, directly impacting the cost of goods and services within the country.
SBI Research forecasts a gradual increase in inflation, projecting 1.8% for 2025-26 and 3.4% for 2026-27. This projection takes into account the combined effects of GST rationalisation, rupee depreciation, and global commodity price fluctuations. The report also indicates a recent reversal in the CPI inflation trend, moving from 0.25% in October 2025 to 0.71% in November 2025, and anticipating a further rise to 2.7% by March 2025.
RBI’s Monetary Policy Stance
The Reserve Bank of India (RBI) plays a crucial role in managing inflation through its monetary policy. Currently, SBI Research doesn’t anticipate any immediate changes to the RBI’s existing interest rate policy, at least for the February monetary policy meeting.
This suggests the RBI is likely to maintain a cautious approach, observing the interplay of various factors influencing inflation before making any adjustments. The central bank will be closely monitoring the impact of GST, the trajectory of the rupee, and global economic developments to determine the appropriate course of action. Managing price stability remains a key objective for the RBI.
Implications and Outlook
The revised estimates regarding the impact of GST on CPI inflation offer a more realistic assessment of the tax reform’s benefits. While the initial projections were optimistic, the 25-35 basis point reduction is still a positive development, contributing to easing the burden on consumers. However, the influence of external factors like the depreciating rupee and global commodity prices cannot be ignored.
Looking ahead, the Indian economy faces a complex inflationary landscape. The interplay between GST-induced deflation and rupee-driven inflation will be critical in shaping the overall price level. Continued monitoring of these trends, along with proactive policy measures from the RBI, will be essential to maintain economic stability and ensure sustainable growth.
It’s important to stay informed about these economic indicators and understand how they impact your financial well-being. Regularly checking updates from reputable sources like SBI Research and the RBI can help you make informed decisions about your spending and investments.
