With the global economy stepping into yet another phase of uncertainties fueled by the USA led tariff war, the SBI Research is expecting a Repo Rate cut of 25 basis points by RBI during its three-day MPC Meeting commenced today. In its latest report, SBI Research has said that factoring in the average inflation envisaged and the output gap consequent upon different GDP scenarios, a cumulative policy rate reduction of 75-100 bps is likely going forward.
The bi-monthly meeting of the Monetary Policy Committee (MPC) of RBI headed by the Governor Sanjay Malhotra has commenced today to deliberate upon current market scenario, liquidity issues and key rates that determine the health of economy in near to long term basis.

The report by Soumya Kanti Ghosh, Member, 16^th Finance Commission and Group Chief Economic Advisor, The State Bank of India (SBI) says that the global growth is likely to face significant headwinds due to non-linear yet intersecting trilemma of trade related tariff barriers, rapid currency swings and fractured capital flows, with no country being immune to the disruptions. According to the report, the global GDP may see a downside of 30-50 bps in the ongoing calendar year and world export volume may decline from 2.9% in 2024 to 1.3% in FY 2025-26. The report indicates a trajectory of rate action by Central Banks, while being accommodative, may remain fuzzy. As far as emerging markets are concerned, the rate will be conditional on the pass through of exchange rate depreciation on to domestic inflation.

 Based on the available estimates of natural rate, the report suggests, the neutral nominal policy rates works out at 5.65%. While CPI inflation may come down to 3.8% in Q4 FY25 (January-March’2025) and average to 4.6% in FY25 (April 1, 2024-March 31, 2025). Average CPI inflation may come to 3.9-4.0% in FY26 and core inflation should come around in the range of 4.2-4.3%. At the same time, food inflation needs to be watched with a likely heat wave unfolding.

SBI Research believes that the improvement in fiscal deficit of states in FY26(BE) as compared to FY25(RE) is largely due to lower growth in total expenditure, specifically capital. The deposit mobilization of banks will remain a challenge in a rate easing cycle. 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.