India's Inflation Outlook Brightens

India’s largest lender, the State Bank of India (SBI), has projected a significant decrease in retail inflation, expecting it to fall below 3% in the first quarter of FY26. This optimistic forecast is accompanied by predictions of aggressive rate cuts by the Reserve Bank of India (RBI), totaling up to 125 basis points in the current fiscal year.

Rate Cuts on the Horizon

According to the SBI Research report, "We expect rate cuts of 75 basis points in June and August (H1) and another 50 bps cut in H2 i.e. cumulative cuts of 125 bps going forward." The report also suggests a potential for cuts up to 150 bps in a best-case scenario, highlighting a 'Goldilocks period' of low inflation and moderate GDP growth.

Inflation Trends and Core Insights

Retail inflation, as measured by the Consumer Price Index (CPI), reached a 67-month low of 3.34% in March 2025, largely due to a sharp decline in food prices. Core inflation, excluding food and fuel, saw an increase from 3.28% in August 2024 to 4.1% by March 2025, driven by a surge in gold prices amid global uncertainties. However, excluding gold, core inflation was just 3.2%.

Future Projections and Risks

SBI anticipates the FY26 average headline inflation to be between 3.7% and 3.8%, assuming no major food price shocks or heatwaves. The report also warns of potential risks to the credit-deposit balance if deposit rates fall sharply, which could coincide with subdued deposit growth.

Economic Growth and Policy Implications

Nominal GDP growth for FY26 is estimated between 9% and 9.5%, slightly below the Union Budget's 10% projection. This scenario reinforces SBI’s view that conditions are ripe for monetary easing, with the central bank’s policy rate potentially falling below the neutral rate by March 2026.