SBI report flags softer inflation trend, sees scope for up to 125 bps RBI rate cuts
A recent SBI research note projected average headline inflation for FY26 at around 3.7%–3.8% (subject to food-price conditions) and suggested CPI could dip below 3% in Q1 FY26. The report also argued that a cumulative 125 basis points of policy-rate cuts may be possible going forward, with liquidity conditions and government dividend transfers potentially supporting a softer yield environment.
What SBI’s latest note suggests
A State Bank of India (SBI) research report has flagged a potentially more benign inflation path in FY26 and argued that the Reserve Bank of India could have room for meaningful monetary easing. The note estimated average headline inflation in FY26 at roughly 3.7% to 3.8%, assuming there are no major food-price shocks or extreme weather disruptions.
The report also suggested that inflation could fall below 3% in the first quarter of FY26, a projection that, if it plays out, would strengthen the case for lower interest rates and improved borrowing conditions across parts of the economy.
Rate-cut call: up to 125 basis points
SBI’s note projected that the RBI could cut policy rates by as much as 125 basis points going forward, and it even raised the possibility that the policy rate could dip below the ‘neutral’ rate by March 2026. It added that a front-loaded 50 bps cut could act as a strong signalling move.
Such a rate path would matter for the broader credit environment—from home loans and MSME borrowing to corporate capex funding—though actual decisions would still depend on inflation data, growth conditions, and external shocks.
Liquidity, yields and risks
On liquidity, the note suggested there may be no major shocks, with Open Market Operations and a strong dividend transfer potentially helping. It said this could keep yields biased downward, with the 10-year yield potentially moving closer to 6%.
However, the report also flagged a possible credit-deposit imbalance risk if deposit rates fall sharply while deposit growth remains subdued—an issue banks watch closely because it affects funding costs and the ability to expand lending.
Why this is being watched
As India moves deeper into FY26, investors and borrowers are closely tracking the inflation trajectory, food prices and RBI commentary. If inflation sustains near the lower end of the comfort band, the focus typically shifts to growth support, transmission of lower rates to borrowers, and stability in the banking system’s deposit mobilisation.