RBI may cumulatively cut key interest rate in range of 125-150 bps in FY26: SBI Research report

06 May 2025 Evaluate

A SBI Research report titled 'Inflation and Rate Cut Trajectory' has said that the Reserve Bank of India (RBI) may cumulatively cut the key interest rate in the range of 125-150 basis points (bps) this fiscal (FY26) amid benign inflationary patterns. It suggested that the central bank should go for ‘jumbo’ rate cuts of 50 bps as it would be more effective. The report said the sharp moderation in consumer price index-based inflation, hitting a 67-month low of 3.34 per cent in March 2025 due to sharp correction in food inflation, bodes well for lowering the average CPI headline forecast for FY2025-26 below 4 per cent now (with below 3 per cent in Q1FY26).

As per the report, the nominal GDP growth is expected to be in the range of 9-9.5 per cent for FY2025-26 (Budget: 10 per cent), signifying a Goldilocks period to slash the policy rates given the low growth and low inflation. It said ‘With multi-year low inflation in March and benign inflation expectations going forward, we expect rate cuts of 75 basis points in June and August (H1) and another 50-bps cut in H2 -- cumulative cuts of 125 bps going forward while 25 bps rate cut has already been initiated in Feb 25’.

It added ‘However, we feel, jumbo cuts of 50 bps, could be more effective than secular 25 bps tranches spread over the horizon’. Based on the available estimates of natural rate, the report said that the neutral nominal policy rates work out at 5.65 per cent. The current trajectory of the domestic inflation is well within the band of 2-6 per cent with average inflation based on available data placed at 4.7 per cent. It said ‘Assuming further convergence of domestic inflation to target, the possibility of cumulative rate cut of 125-150 bps is also possible by March 2026...implying repo rate declining below neutral rate’.

It further said that in response to the 50-bps cut in the policy repo rate since February 2025, banks have reduced their repo-linked EBLRs by a similar magnitude. While the MCLR, which has a longer reset period and is referenced to the cost of funds, may get adjusted with some lag. Larger transmission to deposits rates is expected in the coming quarters. According to the report, the USD/INR pair is expected to stabilise in the range of Rs 85-87 for 2025.

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