RBI may cut rates by up to 125 bps in FY26, says SBI Research report

SBI Research expects a 125 bps rate cut in FY26 as inflation falls to multi-year lows, with liquidity measures like OMOs and pressure on deposit rates likely to follow

 

With March consumer price index (CPI) inflation falling to a multi-year low of 3.34 per cent and expectation of benign inflation going forward, the Reserve Bank of India (RBI) may look at cutting policy rates by as much 125 basis points (bps) in the current financial year (FY26), an SBI Research report said on Monday.

 

It may cut 75 bps in June and August policy meetings and another 50 bps in the second half of FY26, the report said.

 

“We expect rate cuts of 75 bps in June and August (H1) and another 50 bps in H2 i.e. cumulative cuts of 125 bps going forward…”, the report said. Jumbo cuts of 50 bps could be more effective than secular 25 bps tranches spread over the horizon, it added.

 

The RBI’s six-member monetary policy committee has so far cut policy rates by 50 bps — 25 bps each in February and April.

 

“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," the report said.

 

Also, the report highlighted that the RBI’s move to conduct open market operations (OMOs) of another ₹1.25 trillion in May looks aligned to keep liquidity in surplus to the tune of ₹2 trillion as announced by the RBI governor in the last policy meeting. It also factors in the recent volatility in the markets and outlook on anchoring durable growth while negating any impact of exogenous shocks’ pass through.

 

Also, the maturing short forwards position, initiated to cushion the rupee from undue volatility against a masquerading greenback early this year and relentless sell-off by the foreign institutional investors (FIIs), now necessitates RBI to put in place countermeasures, the report said. 

 

The RBI has resorted to OMOs and other measures to pull system liquidity, which was in deficit till the end of March, to surplus. The RBI has injected liquidity to the tune of ₹8 trillion (including VRRs of ₹1.83 trillion beyond 14 days, which has since matured), with another round OMOs of ₹1.25 trillion scheduled for May 2025 in four tranches.

 

In terms of transmission, following a 50 bps cut in policy rates, the weighted average domestic term deposit rate on fresh deposits has declined by 8 bps, while it has increased by 2 bps on outstanding deposits. On the lending side, the median one-year marginal cost of funds-based lending rate (MCLR) has remained unchanged. However, the weighted average lending rate on fresh loans has decreased by 5 bps, and by 10 bps on outstanding loans.

 

“With rapid transmission of rate cuts desired, deposit rates would come under immediate downward pressure, ensuring deposit mobilisation remains a Herculean challenge for banks. While credit growth is expected to moderate at 11-12 per cent for FY26, deposits may stop shy of double digit growth during FY26, accentuating a wedge between Credit-Deposits momentum, squeezing the NIM of banks adversely”, the report said.

 

Meanwhile, the report highlighted that as RBI continues to stabilise the rupee by purchasing foreign currencies, the resulting liquidity boost could significantly improve the RBI’s financial position, contributing to higher profitability and larger dividend payouts in FY25.