A fiber inline Mach-Zehnder interferometer (MZI) based on a microcavity with two symmetric openings in single-multi-single mode fiber (SMSF) structure is proposed. By using the finite difference beam propagation method (FD-BPM), the interference spectrum simulation result shows that the MZI can still have high-quality interference even if the microcavity deviates along the radial direction for 3 μm. Therefore, it allows a larger fabrication tolerance and tremendously decreases the fabrication difficulty. Then a microcavity with two symmetric openings in SMSF was fabricated by using femtosecond laser-induced water breakdown. The insertion loss of the microcavity immerged in water is only -8 dB, and the MZ interference peak contrast in the transmission spectrum reaches more than 30 dB. The MZI based on the microcavity in SMSF can be used as a practical liquid refractive index sensor as its high-quality interference spectrum, ultrahigh sensitivity (9756.75 nm/RIU), high refractive index resolution (2×10-5 RIU), good linearity (99.93%), and low-temperature crosstalk (0.04 nm/°C).