MUMBAI: The Reserve Bank of India (RBI) could lower policy rates by as much as 125 basis points or 1.25 percentage in the current financial year, a research report by the State Bank of India (SBI) has projected, citing subdued inflation and a supportive macro environment.
If the SBI projection plays out, it could drive home loan rates below 7 per cent – levels last seen during the pandemic – but also raise concerns about deposit rate compression in an already tight funding market.
The SBI report forecasts rate cuts of 75 basis points across the June and August monetary policy reviews, followed by another 50 basis points in the second half of FY26.
It argues that front-loaded “jumbo cuts” of 50 basis points would be more effective in boosting demand than the traditional 25 bps tranches.
India’s retail inflation eased to a multi-year low of 3.34 per cent in March, well within the RBI’s comfort zone of 4 per cent.
The central bank has already cut the repo rate by 50 basis points this calendar year – 25 basis points each in February and April – and may continue easing as inflation expectations remain anchored.
“If domestic inflation converges further to the RBI’s 4 per cent target, the repo rate could even fall below the estimated neutral rate,” the SBI report said, suggesting a cumulative reduction of 125 to 150 basis points by March 2026.
However, while borrowers may cheer lower lending rates, depositors could bear the brunt. Even after the recent 50 bps rate cut, the weighted average term deposit rate on fresh deposits has declined by only 8 bps, but with another 125 bps cut in the pipeline, deposit rates could fall further – aggravating banks’ ongoing struggle to mobilize funds.
Deposit rates could come under pressure
“Rapid transmission of rate cuts would mean deposit rates will come under pressure, making deposit mobilisation a Herculean challenge for banks,” the report said.
With credit growth expected to moderate to 11-12 per cent in FY26 and deposits likely growing below 10 per cent, banks may face a widening credit-deposit gap and shrinking net interest margins (NIMs).
The RBI’s liquidity stance also aligns with an accommodative bias. It plans open market operations (OMOs) worth Rs1.25 trillion in May to keep systemic liquidity in surplus, following Rs8 trillion in earlier infusions.
This liquidity support, coupled with the RBI’s forward forex operations to stabilise the rupee, is expected to improve its financial performance – potentially enabling a higher dividend payout to the government in FY25.
The SBI report thus paints a picture of easing rates, cheaper credit, and a liquidity-rich banking environment — but with emerging risks to banking profitability and savings returns, especially in a market where banks are already competing aggressively for deposits.
