Cumulative rate cut over the current cycle could be at least 75 basis points, says SBI Research
The cumulative repo rate cuts over the current cycle could be at least 75 basis points, with 2 successive rate cuts over February and April 2025, according to State Bank of India’s economic research department (ERD).
With an intervening gap in June’2025, the second round of rate cuts could start from October’2025. The cumulative rate cuts could bring down the repo rate to 5.75 per cent from the current 6.50 per cent.
The Department’s economists emphasised that using interest rate as an alibi to protect exchange rate in an inflation targeting regime is inconsistent with the monetary policy committee’s mandate.
Further, they opined that the central bank could look into using the cash reserve ratio (CRR) more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future.
“Given the fiscal stimulus (announced in the Union Budget) and the uncertain impact of trade wars, RBI faces a delicate task of balancing the risks. As the fiscal stimulus plays out, RBI at least in the short run has room for rate cuts. Current pause by Federal Reserve gives some time for RBI to ascertain the inflationary expectations have been fully anchored,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.
The ERD expects CPI inflation to come down to 4.5 % in Q4 (January – March) FY25 and average to 4.8 % in FY25.
“Based on this trend, we expect FY26 inflation may come 4.2-4.4 % and core inflation in the range of 4.4% to 4.6 %. By September 2025 , core inflation may surpass headline inflation. Because of the base effect, headline inflation may average 3.6% to 3.8 % in Q3 (October- December) FY26,” per the assessment of SBI economists.
The ERD assessed that the gap between the total demand for SLR (statutory liquidity ratio) securities by various players such as Banks, insurance companies, Provident Funds, Pension funds, etc and total supply (net borrowing from central and states) at ₹1,66,285 crore in FY26. This gap will be filled in through RBI open market operation (OMO) purchases, the economists said.
Credit growth to continue to decline
As per the latest data (up to 10 January 2025), credit of scheduled commercial banks grew 11.5% year-on-year/yoy (last year: 20.3%) and deposits by 10.8% (last year : 13.1%). However, on year-to-date/YTD basis, credit crew by 8.3% (last year: 16.8%) and deposits by 8.2% (last year 10.8%).
“The sectoral credit growth indicates a decline in across the board, however, during Q3, credit growth picked-up. By looking at the trend growth, both deposits and credit may grow in the range of 11-12% during FY26,” the ERD said.
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Liquidity measures
The economists noted that with an unchanged ownership in Government Securities in FY26, OMO gap in FY26 could still be around ₹1.7 lakh crore. Thus more liquidity measures could be required on a sustained basis.
“The RBI could look into using CRR more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future. There is an urgent need to revisit the existing liquidity management framework by RBI by replacing the WACR (weighted average call rate) as a policy rate as it does not serve the intended purpose,” the economists said.