RBI Expected To Deliver ‘Jumbo’ 50 bps Rate Cut As Liquidity Surges & Inflation Slows: SBI Report

With the Reserve Bank of India's Monetary Policy Committee (MPC) scheduled to meet from June 4 to 6, 2025, SBI Research expects the central bank to deliver a "jumbo" 50 basis point rate cut—the largest since the pandemic—to counter global economic uncertainty and sustain India's growth momentum.

In its latest “Prelude to MPC Meeting” report, SBI Research states, “We expect a 50-basis point rate cut in Jun’25 policy as jumbo rate cut could act as a counterbalance to uncertainty. Liabilities are getting repriced faster in the current rate easing cycle.” The report also suggests that the RBI could cumulatively cut rates by 100 bps in FY26.

India’s Domestic Fundamentals Stay Strong
Despite a moderation in GDP growth, India remains the fastest-growing major economy. In Q4 FY25, GDP expanded by 7.4%, supported by a 9.4% YoY rise in capital formation, a sign of robust investment activity. Private consumption also held steady, with FY25 recording a 7.2% growth, while government spending rose 2.3%.

SBI notes, “We believe that the Indian economy is poised to remain the fastest-growing major economy in FY26 (GDP growth expected at 6.3–6.5%) by leveraging its sound macroeconomic fundamentals, robust financial sector, and commitment towards sustainable growth.”

Additionally, inflation is cooling rapidly, with CPI forecasted to dip to 2.9% in Q1 FY26, thanks to an above-normal monsoon, strong crop arrivals, and falling crude oil prices. Full-year inflation is projected at ~3.5% with a downward bias, and core inflation at 3.7–3.8%.

Liquidity Surplus Hits Historic Highs
India's financial system is awash with liquidity. As of March 31, 2025, system liquidity stood at Rs 1.2 lakh crore. With the RBI’s record dividend of Rs 2.68 lakh crore, SBI estimates core liquidity could reach Rs 5.3 lakh crore by end-June, approximately 2% of Net Demand and Time Liabilities (NDTL).

This surplus provides ample room for monetary easing. According to SBI, “Durable liquidity is likely to remain surplus in FY26. RBI is expected to revisit the liquidity framework in the current year.”

SBI also highlighted that for the first time, liabilities are being repriced faster in a rate-easing cycle, signaling effective transmission of monetary policy.

Liability Transmission Faster than Ever
Following two 25 bps repo rate cuts in February and April 2025, banks have swiftly adjusted their lending and deposit rates. The External Benchmark Lending Rates (EBLRs) linked to repo rates, which now cover 60.2% of loans, were cut by a similar magnitude. In contrast, Marginal Cost of Funds-based Lending Rates (MCLRs), covering 35.9% of loans, show a lag.

SBI emphasizes, “Banks have already reduced interest rates on savings accounts to the floor rate of 2.70%. Also, fixed deposits (FDs) rates have been reduced in the range of 30-70 bps since February 2025.”

Notably, the weighted average domestic term deposit rate (WADTDR) on fresh deposits rose 253 bps during the rate hike cycle, reflecting sharper liability cost escalation than lending rates.

Investment Activity Up, Execution Still Weak
Investment sentiment has rebounded sharply, with new project announcements crossing Rs 50 lakh crore in FY25, a fivefold jump from FY21 levels. However, SBI cautions that actual project execution remains slow.

“Execution appears to be timid as reflected in single-digit growth of ~9% in term loans compared to ~12% growth in overall ASCB credit at the end of Dec’24 vis-à-vis ~25% and ~20% growth respectively a year ago,” the report noted.

Banks in Robust Health, Led by PSBs
Public sector banks (PSBs) have posted stellar financial results. SBI highlights a 26% YoY increase in net profit for PSBs in FY25, compared to just 5.8% for private banks.

Improvements were observed in asset quality and return on assets (RoA), though Net Interest Margins (NIM) and CASA ratios saw slight declines. “The Indian banking sector has been resilient, although heightened global uncertainties underscore the importance of proactive risk management,” SBI noted.

In contrast, private sector banks saw modest growth and mixed performance, with some like IndusInd Bank and RBL Bank reporting significant profit declines.

Credit Growth Muted, Term Deposits Rising
Credit growth has moderated to 9.8% as of May 16, 2025, from 19.5% a year ago, while deposit growth remained stable at 1.4% YTD. Term deposits now constitute 62% of total deposits, as savers shift away from savings accounts, whose share declined to 29.1% in March 2025.

Interestingly, individual borrowers now account for 47.8% of total credit, up from 41.5% in March 2020, with female borrowers’ share rising to 23.8%.

Corporates Hoard Cash Amid Global Uncertainty
Indian corporates are showing signs of caution. Cash and bank balances of Indian Inc. (excluding BFSI) rose to Rs 13.5 lakh crore in FY25, from Rs 5 lakh crore in FY14. Sectors like IT, Automobiles, Refineries, Power, and Pharma led the surge.

SBI explains, “In the last two years (FY24/FY25) we are witnessing an increase in cash and bank balance by Indian Corporates by around 18-19%. This indicates rising risk aversion amid global uncertainty.”

Global Headwinds Remain Strong
While domestic fundamentals are sound, global risks loom large. According to the IMF, global GDP is forecasted to slow by 50 bps in 2025. Growth in China is expected to decelerate to 4%, and in India to 6.3%. World trade volume growth is forecast to fall to just 1.7%.

The U.S. fiscal situation remains fragile, with the FY2025 (Oct-April) deficit at $1.049 trillion, up from $855 billion in the same period last year. US bond yields remain elevated due to tariff uncertainties.
 

Meanwhile, China faces headwinds from real estate stress and weakening consumer sentiment. Rating agencies suggest growth could remain below 4% over the next two years.

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Final Thought: Balancing Growth with Caution
SBI concludes that the time is ripe for bold monetary action. “Keeping the domestic growth momentum intact should be the main policy focus and provides the justification of a jumbo rate cut.”

With inflation well within control, abundant liquidity, and subdued global demand, a 50 bps cut in June and an eventual 100 bps easing in FY26 could inject vitality into a slowing credit cycle.

The RBI’s policy response in June will be closely watched, not just for its magnitude but for the signal it sends on balancing growth ambitions with external volatility.