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When the monetary policy committee meets on February 7, SBI analysts anticipate that the RBI will announce a 0.25 percent rate drop. According to an SBI Research analysis published on Tuesday, the RBI has flexibility for rate decreases, at least in the near term, as the fiscal stimulus of Budget 2025–2026 is implemented.

According to the research, two consecutive rate cuts in February and April of 2025 might result in a total rate decrease of at least 0.75 percent throughout the course of the cycle.

It also said that the second set of rate decreases might begin in October 2025, with a June 2025 hiatus in between.

According to the article, the US Federal Reserve’s present halt offers the RBI some time to make sure inflationary expectations have been properly anchored.

The research emphasized that as the government moves forward on the Fiscal Responsibility and Budget Management (FRBM) route, monetary and fiscal cooperation would need careful handholding.

The research states that the RBI Liquidity Framework should be reviewed since a lack of liquidity might have a negative effect on the economy’s credit flow. As of January 31, 2025, the average liquidity deficit from December 16, 2024, was Rs 1.96 lakh crore, but the average cash balance for the Government of India over the same time period was Rs 2.1 lakh crore. “Based on the RBIs recent liquidity injections, we are estimating the durable liquidity at the end of the financial year may come around Rs 0.6 lakh crore and system liquidity may be around Rs 1 lakh crore surplus,” the paper said.

It also emphasized that the world economy is still resilient and is predicted to expand by 3.2% to 3.3% by 2025. Global inflation has been steadily declining and is predicted to grow closer to most central banks’ inflation objectives, but at varying rates depending on the region.

At this point, it is unclear how trade disputes would affect global economy and, therefore, inflation. According to the article, the image of a full-scale tax across all nations has not yet realized, even if the new US administration’s tariff decision is now limited to North America and to some degree China.

It is generally believed that a new round of trade wars would have varying regional effects and cost 30 to 50 basis points to global GDP growth. According to the SBI analysis, the regional effect would be more complex and dependent on the business cycle stage and regional economic structure.

In light of this global context, the Indian economy is approaching the fourth quarter under the shadow of the Union Budget 2025–2026. With overall fiscal reduction and fiscal stimulus to boost demand, the Center’s net market borrowings are projected to be Rs 11.5 lakh crore for FY26.

As a result, we believe that total fiscal deficit financing will continue to be comfortable. We estimate that long-term instruments might be used to fulfill 75% of the entire funding. As of September 2024, the RBI’s existing OMO purchase of Rs 60,000 crore represents 3.8% of all AFS securities that are available, the paper said.

According to the research, the banking system’s sustainable liquidity position at the end of FY25 may be around Rs 0.6 lakh crore, and system liquidity may be around Rs 1 lakh crore excess, given that loan growth is exhibiting a modest trend notwithstanding the sequential downturn.