RBI may pursue aggressive rate cuts in FY26 amid cooling inflation: SBI report

New Delhi, May 5: The Reserve Bank of India (RBI) is expected to adopt an aggressive rate-cutting stance in the current fiscal year (FY26), spurred by a notable decline in inflation, according to a report released by SBI Research on Monday.

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The report forecasts a total of 125 basis points (bps) in rate cuts over the year, with 75 bps expected in the first half (June and August) and another 50 bps in the second half. In an optimistic scenario, the report suggests that cumulative rate cuts could reach up to 150 bps, depending on inflation trends.

This projection follows a significant drop in Consumer Price Index (CPI) inflation, which hit a 67-month low of 3.34% in March 2025, largely due to easing food prices. With inflation expectations remaining subdued, the SBI report anticipates that average headline CPI inflation for FY26 will fall below 4%, potentially dipping under 3% in the first quarter, provided there are no major shocks such as a food crisis or heatwave.

SBI Research also noted that a bold 50 bps rate cut early in the cycle could serve as a strong signal of intent from the central bank, reinforcing its dovish stance.

Additionally, the report suggests that the policy rate could fall below the neutral rate by March 2026, a move that could further stimulate economic activity.

However, the report also flags potential risks. One concern is the widening of the credit-deposit wedge, as deposit rates may decline in response to falling policy rates, possibly exacerbated by slow deposit growth.

On the liquidity front, the outlook remains positive. The report expects no major disruptions, with support from Open Market Operations (OMOs) and a healthy dividend transfer likely aiding yield management. As a result, bond yields are projected to edge closer to 6%, with a downward bias.