New Delhi, May 5 The benign inflationary patterns suggest an aggressive rate cut trajectory by the Reserve Bank of India, with key policy rate likely to breach the ‘Neutral’ rate by March 2026, an SBI Research report said on Monday.
A cumulative rate cut of 125-150 bps is estimated in FY26 in the best case scenario with inflation to breach 3 per cent consistently for next three months barring any food price shock/heatwave, the report mentioned.
“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 February (that could put the terminal rate at 5.0-5.25 per cent by March 2026),” the SBI report projected.
“However, we feel, jumbo cuts of 50 bps, could be more effective than secular 25 bps tranches spread over the horizon,” it added.
Based on the available estimates of natural rate, the neutral nominal policy rates works out at 5.65 per cent.
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.
“We expect 100 bps cut in bank deposits rates from current levels,” said the report.
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.
The report further stated that it expects the USD/INR pair to stabilise in the range Rs 85-87 for 2025.
"The domestic impact of tariffs on dollar will be visible in 2025 which will support rupee. Further, DXY is expected to fall as US domestic economy will adjust to tariff impact,” it noted.
With close to Rs 4 lakh crore of open Market operations (OMO) done and another Rs. 1.25 lakh crore (or more) pending, G-Sec holding by banks as percentage of SLR portfolio is on the decline.
“Moreover, larger holding by the regulator, at times, tends to affect secondary market liquidity. The RBI dividend could top Rs 2 lakh crore,” the report mentioned.
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