RBI Poised for 25 BPS Repo Rate Cut Ahead of Early Diwali, Says SBI
The report stressed that with inflation consistently within the RBI's target band for several months, maintaining a restrictive policy stance risks "output losses" that are difficult to reverse.
- Republic Business
- 2 min read
The Reserve Bank of India (RBI) is widely expected to announce a 25 basis points (bps) repo rate cut during its upcoming Monetary Policy Committee (MPC) meeting, scheduled from August 5 to 7. This projection comes from a recent State Bank of India (SBI) report, which suggests the "frontloaded" rate cut could usher in an "early Diwali" by significantly boosting credit growth.
According to the SBI report, a pre-festive season rate cut has historically led to higher credit growth, especially with the festive season in FY26 also being frontloaded. "We expect RBI to continue frontloading with a 25 bps cut in the August policy," the report stated.
Citing past trends, the SBI highlighted that a 25 bps repo rate cut in August 2017 resulted in an incremental credit growth of Rs 1,956 billion by the end of Diwali, with personal loans accounting for nearly 30% of this increase. Diwali, being a major Indian festival, typically sees increased consumer spending, and a lower interest rate environment before this period is crucial for stimulating credit demand. The report emphasized, "Empirical evidence suggests a strong pick up in credit growth whenever the festive season has been early and has been preceded with a rate cut."
The report stressed that with inflation consistently within the RBI's target band for several months, maintaining a restrictive policy stance risks "output losses" that are difficult to reverse. It cautioned that monetary policy operates with a lag, and delaying a rate cut in anticipation of further inflation drops or slower growth could cause "deeper and long-lasting damage to the economy."
"The marginal benefit of waiting is low, while the cost of inaction in terms of forgone output and investment sentiment is likely to be significant," the SBI report warned. It further explained that central banks have a dual mandate of price stability and output stabilization. Referring to the standard quadratic loss function, the report advised against making a type II error by not cutting rates now, assuming current low inflation is merely temporary, when in fact, inflation could remain subdued and the output gap could worsen.
The report also noted that factors like tariff uncertainties, GDP growth, CPI numbers for FY27, and even the festive season in FY26 are all being frontloaded, further supporting the case for an immediate rate cut.