A fresh SBI report published on Monday predicts a major 50-basis point cut in the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) action in June.
The report indicates that such a steep cut would be able to revive the credit cycle and bring some stabilizing effect at a time when the economy is witnessing uncertainties.
SBI Group Chief Economic Adviser Dr. Soumya Kanti Ghosh suggested that the overall easing in this cycle could be as much as 100 basis points. He said, "Domestic financial stability issues and concerns have abated. Inflation is likely to remain in the tolerance bracket. Maintaining the domestic growth momentum should be the priority policy objective and give the rationale for a jumbo rate reduction."
The report points out that with liquidity being in excess for some time now, liability costs are reorienting themselves rapidly as the rate-cutting cycle continues. Savings account rates have already been reduced to the bottom level of 2.70%. Fixed deposit rates have also been reduced by 30 to 70 basis points from February 2025, with additional transmission to deposit rates expected to be strong in future quarters.
India's economy clocked a growth of 7.4% in Q4 of FY25, down from the 8.4% growth in the corresponding quarter of the previous year. Growth was spearheaded mainly by a jump in capital formation, which grew 9.4% year-on-year.
The report also noted, “Above normal monsoon prediction by IMD, strong arrival of crops and decline in crude oil prices are revising down our CPI estimate to 3.5 per cent in FY26 with a downward bias.”
Based on the RBI’s latest Annual Report, higher expected savings are likely to provide adequate domestic financial resources to support growth without triggering demand-driven inflationary pressures in FY26.
India's financial stability risks have eased, underpinned by robust performances by Indian banks, led by public sector banks (PSBs). PSBs reported a spectacular 26% year-on-year profit rise, while private banks reported a more subdued 5.8% rise.
System liquidity moved into excess, totaling Rs 1.2 lakh crore as of March 31. Adjusted for the RBI dividend of Rs 2.68 lakh crore, the report estimates core liquidity to be Rs 5.3 lakh crore by June-end. It forecasts durable liquidity to be in excess even in FY26.
In this context, the RBI is confronted with the task of ensuring that inflation is contained without allowing domestic growth to slow down and investment activity to be supported.
The SBI report summarizes, "We expect that RBI will continue with its rate cut by 50 bps to support growth."
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