Can you describe an instance where Sai Baba demonstrated his ability to know people's innermost thoughts?

Yes, Chapter 28 of the Shri Sai Satcharitra recounts a powerful story involving a devotee named Laxmichand. He privately thought that Baba's persistent cough might be the result of an evil eye. Shortly after, when Madhavrao approached Baba, Baba spoke aloud, "Yesterday I had much coughing; is this the effect of an evil eye?" This stunned Laxmichand, who wondered how Baba could know his exact thought, leading him to realize that Baba dwells in everyone's heart. This experience moved him to plead for Baba's continued grace and protection.