SBI research predicts aggressive rate cuts by RBI in FY26 amid benign inflation

The Reserve Bank of India (RBI) is likely to have an aggressive rate cut trajectory for the current fiscal year (FY26), driven by the significant moderation in inflation, said a report by SBI Research on Monday.

"We expect rate cuts of 75 basis points in June and August (H1) and another 50 bps cut in H2 i.e. cumulative cuts of 125 bps going forward" said the report.

The report highlights, that the Consumer Price Index (CPI) inflation has hit a 67-month low of 3.34% in March 2025, primarily due to a sharp correction in food inflation.


With multi-year low inflation in March and benign inflation expectations going forward, SBI research sees a substantial cumulative rate cut of approximately 125-150 basis points (bps) in FY26 under the most favourable scenario, attributed to the inflationary pattern forecast.

However, the report also suggests that a significant 50 bps rate cut could serve as a strong signalling mechanism from the central bank.

Furthermore, the SBI forecasts that the key policy rate could even breach the neutral rate by March 2026.

The State Bank of India research projects the average CPI headline inflation for FY26 to fall below 4 per cent, with expectations of it remaining below 3 per cent in the first quarter, provided there are no unforeseen shocks in food prices or a heatwave.

However, it points out 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 lacklustre deposit growth.

On the liquidity front, the report anticipates no negative surprises, supported by Open Market Operations (OMOs) and a robust dividend transfer, which are expected to contribute to better yield management. Consequently, yields are predicted to move closer to 6 per cent with a downward bias.

The report underscores 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 per cent for FY26.