What Do Cumulative Rate Cuts of 125-150 bps Mean for FY26? SBI Report Insights
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Synopsis
As inflation remains favorable, the SBI Research report predicts significant rate cuts by the Reserve Bank of India. With a potential reduction of 125-150 bps in FY26, key policy shifts could impact the financial landscape. Discover how these changes may unfold and their implications for the economy.
Key Takeaways
- Anticipated rate cuts of 125-150 bps in FY26.
- Inflation trends expected to exceed 3 percent.
- Rate cuts of 75 bps likely in June and August.
- Projected USD/INR stability between Rs 85-87.
- RBI dividend could surpass Rs 2 lakh crore.
New Delhi, May 5 (NationPress) The current inflation trends indicate a potential aggressive path for rate reductions by the Reserve Bank of India, with the main policy rate expected to fall below the 'Neutral' rate by March 2026, according to an SBI Research report released on Monday.
In the most favorable scenario, a total rate cut of 125-150 bps is anticipated for FY26, assuming inflation exceeds 3 percent consistently over the next three months, barring any unforeseen shocks from food prices or extreme weather conditions, the report stated.
The report forecasts, “With multi-year low inflation recorded in March and positive inflation expectations ahead, we foresee rate reductions of 75 basis points in June and August (H1) and an additional 50 bps cut in H2, accumulating to 125 bps overall, considering a 25 bps rate cut already implemented in February (which may lower the terminal rate to 5.0-5.25 percent by March 2026).”
“However, we believe that substantial cuts of 50 bps could yield better results than gradual 25 bps reductions spread across the period,” it noted.
Based on existing estimates, the neutral nominal policy rate is calculated to be 5.65 percent.
In reaction to the 50 bps reduction in the policy repo rate since February 2025, banks have similarly lowered their repo-linked EBLRs.
While the MCLR, which has a longer adjustment period and is tied to funding costs, might experience a delay in adjustment. A larger transmission to deposit rates is expected in the upcoming quarters.
“We anticipate a 100 bps reduction in bank deposit rates from current levels,” the report indicated.
The present trend of domestic inflation remains comfortably within the range of 2-6 percent, with the average inflation rate based on available data positioned at 4.7 percent.
Additionally, the report projects that the USD/INR exchange rate will stabilize between Rs 85-87 for 2025.
“The domestic effects of tariffs on the dollar will manifest in 2025, supporting the rupee. Furthermore, a decline in DXY is expected as the US economy adapts to tariff repercussions,” it added.
With approximately Rs 4 lakh crore in open market operations (OMO) conducted and an additional Rs 1.25 lakh crore (or more) pending, the proportion of G-Sec holdings by banks as part of their SLR portfolio is decreasing.
“Moreover, a larger holding by the regulator at times may impact secondary market liquidity. The RBI's dividend could exceed Rs 2 lakh crore,” the report mentioned.
Point of View
It's crucial to consider the implications of the anticipated rate cuts on various sectors. The SBI report indicates a proactive approach by the Reserve Bank of India in managing inflation, which is commendable. However, the effectiveness of such measures will depend on real-world impacts on consumers and businesses alike. Maintaining transparency and fostering trust in monetary policy will be essential as we navigate these changes.
NationPress
21/05/2025
Frequently Asked Questions
What are the expected rate cuts for FY26?
The SBI report estimates cumulative rate cuts of 125-150 basis points in FY26.
What factors could influence these rate cuts?
Inflation trends, particularly if they exceed 3 percent, and any shocks from food prices or extreme weather could influence these cuts.
When are the expected rate cuts scheduled?
The report forecasts rate cuts of 75 basis points in June and August and an additional 50 bps cut in H2.
What is the current inflation rate in India?
The average inflation rate is currently estimated at 4.7 percent, within the 2-6 percent band.
How could these cuts affect bank deposit rates?
The report anticipates a reduction of 100 basis points in bank deposit rates from current levels.
