RBI Article: GST Reforms Expected to Reduce Retail Prices and Stimulate Consumption

The Reserve Bank of India (RBI) highlighted in its September bulletin article that the recent Goods and Services Tax (GST) reforms are expected to have a positive impact on retail prices and consumption in India. These reforms, which came into effect from September 22, replaced the earlier four-rate tax system with a simplified two-slab structure of 5% and 18%. The central bank emphasized that this landmark reform is likely to improve the ease of doing business, reduce retail prices, and strengthen consumption growth drivers, thereby creating a sustained positive effect on the economy.

According to a recent analysis by Bank of Baroda, the net gain to consumption arising from the GST reforms is estimated to be around ₹0.7–1 lakh crore, translating to approximately 0.2–0.3% of India’s GDP from the second quarter of the current fiscal year. This indicates a notable boost to domestic demand, driven primarily by the reduction in tax rates and increased affordability of goods and services.

The RBI article further highlighted that the transmission of front-loaded monetary easing measures has been robust. Since February 2025, the central bank has reduced the repo rate by 100 basis points (bps), providing additional support to economic activity. The article noted that this monetary easing, when combined with income tax relief for households and initiatives to enhance employment, sets the stage for a sustained pick-up in consumption demand in the second half of FY26. This could potentially initiate a virtuous cycle of higher investment and stronger economic growth, helping India overcome persistent global uncertainties, including geopolitical tensions and trade disruptions.

The RBI also pointed out that strong corporate balance sheets and the government’s focus on structural reforms are bright spots in the economy. Healthy financial conditions among companies, along with policy-driven reforms, have bolstered economic resilience and supported robust growth across sectors.

Despite ongoing global uncertainties, including the imposition of high US trade tariffs, India has shown notable economic resilience. The country’s GDP growth in the first quarter of FY26 reached a five-quarter high of 7.8%, compared to 6.5% during the same period last year and 7.4% in January-March 2025. The article stressed that domestic demand and policy measures have helped mitigate the negative impact of external challenges on the macroeconomic outlook.

The RBI article clarified that its observations represent the views of the authors and do not necessarily reflect the institution’s official stance. Nevertheless, it underscored the importance of continued structural reforms, fiscal prudence, and supportive monetary policy to sustain economic momentum.

The article also mentioned the recent upgrade of India’s sovereign rating by S&P Global Ratings. In the previous month, S&P upgraded India’s rating from BBB- to BBB with a stable outlook, recognizing India as one of the best-performing economies globally. This rating upgrade serves as an acknowledgment of India’s resilience, growth potential, and policy effectiveness in navigating both domestic and international challenges.

Overall, the RBI emphasized that the combination of GST reforms, accommodative monetary policy, strong corporate finances, structural reforms, and robust domestic demand is expected to sustain economic growth, lower retail prices, and stimulate consumption, providing a favorable environment for investment and long-term economic development in India.