RBI May Cut Rates By 25 Basis Points

Amidst GST changes and low inflation, RBI may cut rates by 25 basis points The Reserve Bank of India's (RBI) next Monetary Policy Committee (MPC) meeting is scheduled from September 29 to October 1, 2025. At this meeting, the RBI will announce its repo rate and next monetary policy move. According to SBI Research, a 25 basis point (bps) rate cut would be the most appropriate option at this time. The report also states that yields have increased in domestic and international markets in recent times, making it crucial for the RBI to communicate its policy in a clear and balanced manner.

Why is a rate cut necessary in September?
The RBI cut its policy rates in June 2025. Subsequently, yields in the market began to rise, posing challenges for investors and financial institutions. SBI Research believes that a 25bps rate cut in September would be the best move for the Indian economy.

According to SBI Research, due to the GST changes and low inflation, it would be the right move for the RBI to reduce rates now. Inflation has been stable since June, and the CPI is expected to remain around 4% or below in FY27. Due to the GST changes, it could reach 1.1% in October, the lowest since 2004.

The report also states that if the RBI does not reduce rates now, it would be considered a Type 2 error. That is, making no policy changes without taking this into account. At a time when inflation is low, a rate cut would be in line with market expectations and send a positive signal to investors.

Global Situation and the Role of Central Banks
Central banks around the world, not just in India, are also cautious about monetary policy. Many countries have recently reduced rates, but the market is still not stable. Rising yields (security returns) are becoming a common problem in global financial markets. According to SBI Research, regular and clear information from central banks is the best way to resolve market confusion.

In the United States, the Federal Reserve (Fed) recently reduced its Fed Funds Rate from 4% to 4.25%. According to the Fed, the reduced number of workers and fewer people participating in the workforce were the reasons for this move. The Fed Chairman called it a "risk management cut" and stated that this would keep long-term inflation close to the 2% target. He believes that small cuts at the right time are the right way to balance the economy.

The report states that the job and employment situation in the United States is somewhat difficult. Home prices are rising, ARM rates are stable, and there are some food supply problems. These factors have led to the Fed's recent rate cuts, and further rate reductions are likely in the coming months.

Changes in India's Government and State Debt
India has seen a recent increase in government and state development loans (SDLs). According to SBI Research, state government debt is rising, which could increase fiscal pressure. The share of long-term SDLs increased from 22% in FY2018 to 71% in FY2026. This is particularly true for loans with a maturity of 10 years or more.

The report states that the central and state governments are attempting to lengthen the maturity of their debt. To do this, they have used "switching," i.e., replacing short-term loans with long-term loans. This will reduce the pressure on states to repay immediately and maintain a stable financial position.

Furthermore, there are variations in SDL issuances across states. Andhra Pradesh has issued the highest number of papers, while Maharashtra has the highest average. This means that investors will have to make investment decisions based on new strategies and long-term risk management.

The Role of Foreign Investors and FPIs
The report states that foreign investors (FPIs) are becoming more active in India's bond market. They have been given the flexibility to invest more under the Fully Accessible Route (FAR). Currently, FPIs hold approximately ₹3 lakh crore in bonds. Their equity share represents approximately 16% of market capitalization.
The interest rate gap between the US and India may widen in the future. Furthermore, there is a possibility of Indian bonds being included in global indexes. This will increase demand from foreign investors and improve liquidity in the market.

The Importance of Clear Communication of the Central Bank
SBI Research states that the central bank's communication strategy is the most important toolkit for monetary policy. While decisions were made collectively in the MPC meetings of June and August 2025, members expressed their views in different ways. In June, the main discussion centered on rates and money transfers, so the market remained largely unmoved. However, in August, members raised issues such as global risks, food prices, and other issues, increasing market volatility.

The report also noted that this divergence of opinion was measured by the Weighted Thematic Divergence Index (WTDI). This indicates that policy impact is not solely determined by rate changes, but also by the members' reasoning and clarity of their arguments.