According to a report by SBI Research, the Reserve Bank of India (RBI) is expected to implement an aggressive rate cut trajectory for the current fiscal year (FY26). This is driven by the significant moderation in inflation, which has hit a 67-month low of 3.34% in March 2025. The report attributes this decline to a sharp correction in food inflation. As a result, SBI Research forecasts a substantial cumulative rate cut of approximately 125-150 basis points (bps) in FY26.
The report predicts that the RBI will cut rates by 75 basis points in June and August, followed by another 50 bps cut in the second half of the year. This would result in a cumulative cut of 125 bps. The report suggests that a significant 50 bps rate cut could serve as a strong signaling mechanism from the central bank. The key policy rate is expected to breach the neutral rate by March 2026.
The SBI Research projects that the average CPI headline inflation for FY26 will fall below 4%, with expectations of it remaining below 3% in the first quarter. However, the report also highlights a potential challenge arising from these rate cuts, such as the credit-deposit wedge may widen. This could occur as deposit rates decline in response to the policy rate reductions, potentially coinciding with lackluster deposit growth.
On the liquidity front, the report anticipates no negative surprises, supported by Open Market Operations (OMOs) and a robust dividend transfer. Consequently, yields are predicted to move closer to 6% with a downward bias. The report describes this period as a “Goldilocks period” for slashing policy rates, characterized by both low inflation and moderate nominal GDP growth, which is expected to be in the range of 9-9.5% for FY26.
Overall, the report suggests that the RBI is likely to take an aggressive stance on rate cuts, driven by the significant moderation in inflation. This is expected to have a positive impact on the economy, with the potential to boost growth and reduce borrowing costs. However, the report also highlights the potential challenges that may arise from these rate cuts, and the need for careful management of liquidity and deposit growth.