The Reserve Bank of India (RBI) is expected to announce a 25 basis points (bps) cut in the repo rate during its upcoming Monetary Policy Committee (MPC) meeting scheduled for August 5–7, according to a report by the State Bank of India (SBI).
The report suggests that a rate cut this month could serve as an “early Diwali gift,” potentially boosting credit growth, especially with the FY26 festive season also arriving earlier than usual.
SBI noted a historical pattern: repo rate cuts ahead of Diwali have typically led to a surge in credit growth during the festival period. For example, a 25 bps rate cut in August 2017 resulted in an incremental credit increase of ₹1,956 billion by Diwali, with nearly 30% of it coming from personal loans.
“Diwali is one of the biggest consumption periods in India,” the report stated. “A lower interest rate environment before the festival significantly supports consumer spending and credit demand.”
The report emphasized that inflation has remained within the RBI’s target band for several months. Maintaining a restrictive monetary stance under these conditions could lead to economic output losses that are difficult to recover.
“Monetary policy operates with a lag,” SBI cautioned. “Waiting too long for further signs of disinflation or slower growth may cause avoidable and long-lasting economic damage.”
The report also warned against committing a Type II error—failing to act on the assumption that current low inflation is temporary. It highlighted that if inflation remains low, delaying action could worsen the output gap. It also pointed out that uncertainties around tariffs, GDP growth, and FY27 inflation figures are all being frontloaded, reinforcing the case for a timely rate cut.
Lastly, SBI underscored the RBI’s dual responsibility: ensuring both price stability and supporting economic growth. It argued that the benefits of an immediate rate cut outweigh the risks of inaction.
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