RBI likely to cut rates by 125 bps this fiscal: SBI Research

New Delhi: India’s headline retail inflation is likely to fall below 3% in the April-June quarter that will prompt the Reserve Bank of India (RBI) to cut policy interest rates cumulatively by 125 basis points (1.25%) in the current financial year, SBI Research said on Monday.

“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 and another 50 bps cut in the second half of the year i.e. cumulative cuts of 125 bps going forward,” SBI Research said in a report.

The RBI lowered policy interest rates by 25 basis points each in February and April. The next bi-monthly meeting of the central bank’s rate setting panel Monetary Policy Committee is scheduled in June.

SBI Research suggested a 50 basis points rate cut in the upcoming MPC meeting. “We feel, jumbo cuts of 50 bps, could be more effective than secular 25 bps tranches spread over the horizon,” it said.

A sharp moderation in inflation has brightened the hope for reduction in interest rates. Consumer Price Index (CPI) based inflation dipped to a 67-month low of 3.34% in March. The data for April is scheduled to be released next week.

“We believe average CPI headline forecast could stay below 4% till December 2025 and FY26 average may be 3.7-3.8%, unless there is any food price related shock,” the report authored by Soumya Kanti Ghosh, SBI Group Chief Economic Adviser and Member 16th Finance Commission, noted.

The current trajectory of CPI retail inflation is well within the band of 2-6%, which the RBI has been mandated by the government to follow.

On transmission of the RBI monetary policy action, SBI Research said that banks have reduced their repo-linked external benchmark lending rates (EBLRs) by a similar magnitude. Transmission to deposit rates is expected in the coming quarters. “We expect a 100 bps cut in bank deposit rates from current levels,” SBI Research said.

While credit growth is expected to moderate at 11-12% for FY26, deposits may stop shy of double digit growth during the FY accentuating a wedge between credit-deposits momentum, squeezing the net interest margin (NIM) of banks adversely, it said

It said the Indian rupee is likely to stabilize in the range of 85 to 87 against the US dollar in 2025. “The domestic impact of tariffs on the dollar will be visible in 2025 which will support the rupee,” it added.