SBI Research Sees Terminal Rate At 5.75% In RBI's Current Rate Cycle

SBI Research sees the terminal repo rate in India to reach 5.75% from the current level of 6.5% in the present rate cycle of the Reserve Bank of India. It expects the central bank to start cutting rates from the upcoming meeting of the monetary policy committee.

The brokerage expects two cumulative 25-bps rate cuts from February and one in April. A gap in June's policy meeting is expected. The second round of rate cut will start from October this calendar year, SBI Research said in a note on Tuesday.

The RBI's Monetary Policy Committee is scheduled to meet on Feb. 5–7.

India's Consumer Price Index-based inflation may average at around 4.8% in the financial year 2025, SBI Research said. In the fourth quarter, inflation will come down to 4.5%.

In the financial year 2026, inflation may fall to the range of 4.2–4.4%, and the core inflation to 4.4–4.6%, according to SBI Research. By September 2025, core inflation will rise beyond headline inflation because of the base inflation.

Fiscal stimulus and uncertain impact of trade wars due to the US' sporadic decision on tariff rates presents a delicate situation in front of the RBI to balance out risks. While the fiscal stimulus plays out, the central bank has room for rate cuts, SBI Research said.

Moreover, the current pause in the US Federal Reserve's rate cycle also gives time to the RBI to ascertain inflationary expectations have been fully anchored, SBI Research said.

The latest round of trade wars may cost 30–50 bps to the global GDP with differing regional impacts. In the meantime, global markets continued to exhibit resilience and expected to grow in the range of 3.2–3.3% for 2025, SBI Research said.

Global inflation softened defying regional uncertainty due to the impact of trade wars, the brokerage said.

Impact of tariffs on domestic inflation of exporting countries will depend on whether the 'exchange rate' factor or 'negative demand shock' factor outweighs the other and what is pricing power in general, according to SBI Research.

Canada sees higher inflation in the long run if the trade war persists. The impact on China will be limited as its export basket of the country is well diversified, according to SBI Research.

Growth factors, such as the real GDP, dominates rupee's volatility in the long run, while factors like dollar index, interbank call money rate affects the USDINR movement in the short term, SBI Research said. The brokerage believes this substantiates that using interest rates to protect exchange rate in an inflation targeting regime is inconsistent with the mandate.

SBI Research estimates durable liquidity to be around Rs 60,000 crore by the end of the ongoing financial year. The system liquidity is to be around Rs 1-lakh-crore surplus. The brokerage based its views on recent liquidity measures of the RBI.

More liquidity measures are required on a sustainable basis, SBI Research said. The brokerage suggests that the central bank should think of using CRR more as a regulatory intervention tool or as a counter cyclical liquidity buffer rather than as a liquidity tool in the future.

SBI Research also emphasised on the need to revisit the liquidity management framework by the Reserve Bank of India by replacing the weighted average credit rating as a policy rate as it does not serve the intended purpose.

SBI Research noticed sectoral credit growth declining trend across the board. However, during October–December, credit growth picked up. Based on current trends, SBI Research said that credit growth will range 11–12% in the financial year 2025.