Context:
SBI Research predicts that the Reserve Bank of India (RBI) may cut policy rates by up to 125 basis points in FY26, following a multi-year low inflation reading of 3.34% in March. This forecast is based on expectations of continued benign inflation and the need for accommodative monetary policy.
Key Forecasts and Rationale
Policy Rate Cut Expectations
- Total projected rate cuts in FY26: 125 bps
- 75 bps in H1FY26 (June and August policy reviews)
- 50 bps in H2FY26
- Current repo rate: 6.25% (after a cumulative 50 bps cut in February and April 2025)
- Possibility of the repo rate falling below the neutral rate by March 2026
- Larger 50 bps cuts are expected to be more effective than smaller 25 bps cuts spread over time
Inflation Outlook
- March CPI inflation: 3.34%, marking a multi-year low
- Domestic inflation is expected to converge toward the RBI’s 4% target, supporting the likelihood of further rate cuts
Liquidity Management and Open Market Operations (OMOs)
- RBI is expected to conduct ₹1.25 trillion in OMOs in May 2025
- Goal: Maintain a system liquidity surplus of ₹2 trillion, as per the RBI Governor’s guidance
- OMOs are intended to offset:
- Maturing short-dollar forward positions
- Volatility from FII outflows
- Exchange rate pressures faced earlier in 2025
Macroeconomic Implications
- Easing rates could stimulate:
- Private investment
- Durable growth
- Credit offtake, particularly in interest-sensitive sectors
- The RBI’s current strategy aims to:
- Anchor growth while absorbing external shocks
- Maintain stability in financial markets
