5.5% repo rate to stay longer; bar for further rate cut in 2025 higher: SBI Research

As the RBI-led MPC unanimously decided to keep the repo rate unchanged at 5.5%, SEBI Research in its latest report has dubbed today’s pause as the ‘technical pause’ as the inflation projections are hovering in the band of uncertainty, which, it stated, may sharply increase to 4.9% in Q1 FY27.

The RBI, in its MPC announcements today, revised downwards its FY26 CPI inflation projection by 60 bps to 3.1%. The revision factors in the steady progress of monsoon, healthy Kharif sowing, adequate reservoir levels and comfortable buffer stocks of food-grains. The RBI has kept the projection for real GDP growth for FY26 at 6.5% owing to resilience in private consumption, aided by rural demand, and fixed investment, supported by buoyant government capex.

Under such a scenario, along with the expectation of robust GDP growth, if RBI inflation projections for FY26 may remain correct, then a 5.5% repo rate may be the terminal rate. However, if the inflation numbers do undershoot, the window will open up, but it will be at most a 25 bps, the report says.

The crucial point, however, will be the timing of such a move, if any, says SBI. "The difficult part for such a further rate cut is that with front-loading already done and a front-loaded robust GDP growth in the first half, the bar for a rate cut in 2025 has now moved even higher! Can there be a rate cut with such a large intervening gap from June 2025?" asks Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The RBI-led MPC unanimously decided to keep the repo rate unchanged at 5.5%. The RBI's decision comes against the backdrop of lingering uncertainty unleashed by the global tariff wars. "With a large part of the rate cuts having been frontloaded, the RBI decision to hold the rates was guided by caution and wait for more incoming data," writes Ghosh.

Notably, all members of the MPC decided to continue with the neutral stance. The RBI-led MPC resolved to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path.

The impact of the past cut was closely watched by the RBI in the run-up to the MPC meeting. RBI Governor, in his statement, said: “...even though the growth rate of bank credit slowed last year, the overall flow of financial resources to the commercial sector increased from ₹33.9 lakh crore in 2023-24 to ₹34.8 lakh crore in 2024-25. This trend continues during the current financial year as well.”

A disaggregate analysis shows while the flow of bank credit declined by Rs 3.4 lakh crore, the flow of non-bank resources increased by Rs 4.3 lakh crore, indicating the slowdown of bank credit in FY26 is not a novel phenomenon and the slowdown has perpetuated from last fiscal itself, the SBI report adds.

On the development and regulatory policy front, the RBI announced two measures: auto-bidding facilities in RBI Retail Direct for Investment and Re-investment in T-bills and the enhancement of accessibility and simplification of the search process for unclaimed deposits.