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SBI economists predict 75-100 bps rate cut by March 2026, with inflation projections and potential GDP scenarios.
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Bloomberg
State Bank of India’s economic research department expects a cumulative policy rate reduction of 75-100 basis points by March 2026, factoring in the average inflation envisaged and the output gap consequent upon different GDP scenarios.
SBI’s economists assessed that based on the available estimates of natural rate the neutral nominal policy rates works out at 5.65 per cent.
They expect retail inflation to come down to 3.8 per cent in Q4 (January-March) FY25 and average to 4.6 per cent in FY25. Further, average retail inflation may come to 3.9-4.0 per cent in FY26 and core inflation should come around in the range of 4.2-4.3 per cent. However, vigil is warranted on food inflation with a likely heat wave unfolding.
“During February 2025 to March 2026, we expect at least 100 bps cut in repo rate (25 bps already cut in February 2025 and another 75 bps in the rest of FY26),” the economists said in a special report.
There will be a one-to-one transmission of this cut to the external benchmark-based lending rate (EBLR) and 60 bps in marginal cost of funds-based lending rate (MCLR), per the report.
The Weighted Average Domestic Term Deposit Rate (WADTDR) for fresh deposits will reduce by 100 basis points. The WADTDR for outstanding may reduce by 75 bps. The weighted average lending rate (WALR) for fresh and outstanding loans may decline by 85 bps and 62-65 bps, respectively.
The economists observed that deposit mobilisation of banks will remain a challenge in a rate easing cycle. The challenge on this front is compounded by low tax adjusted returns and a complete move to JIT (just-in-time) cash management by the government. Also, Indian banks have significant constraints to passively transmit the change in deposit rates across the board given the preponderance of bulk deposits and its dispersion across various maturity buckets.
The economists assessed that 45.5 per cent of ASCB (all scheduled commercial banks) deposits over ₹1 crore was in bulk deposits (Dec 24). They suggested that it may be time to benchmark stable bulk deposits with alternate reference rates.
They expect durable liquidity to remain surplus in FY26, supported by several factors, like OMO (open market operation) purchase of government securities, RBI’s dividend transfer, BoP (balance of payments) surplus of around $20-30 billion in FY26.
However, by looking at the trend growth, both deposits and credit may grow in the range of 10-11 per cent during FY26.
Published on April 7, 2025
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