RBI may announce 25 bps rate cut in August to boost credit growth ahead of Diwali: SBI Report

The Reserve Bank of India (RBI) is expected to announce a 25 basis points (bps) repo rate cut in the upcoming Monetary Policy Committee (MPC) meeting scheduled from August 5 to 7, according to a report by the State Bank of India (SBI).The report said a frontloaded rate cut in August could bring an "early Diwali" by boosting credit growth, especially as the festive season in FY26 is also frontloaded. It added that past data show a clear trend, any repo rate cut ahead of Diwali results in higher credit growth during the festive period.It stated, "We expect RBI to continue frontloading with a 25 bps cut in August policy."Citing an example, the report noted that a 25 bps repo rate cut in August 2017 led to an incremental credit growth of Rs 1,956 billion by the end of Diwali, with almost 30 per cent of this in personal loans.It added that Diwali, being one of the biggest festivals in India, sees higher consumer spending, and a low-interest rate environment before Diwali helps improve credit demand."Empirical evidence suggests a strong pick up in credit growth whenever festive season has been early and has been preceded with a rate cut," the report added.The report emphasized that with inflation now well within the RBI's target band for several months, continuing with a restrictive policy stance may lead to output losses, which are hard to reverse.It said monetary policy works with a lag, and delaying a rate cut until inflation drops further or growth slows more visibly may 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, investment sentiment is likely to be significant," the report said.The report further explained that central banks operate with a dual mandate of price stability and output stabilization.Referring to the standard Quadratic Loss Function, it warned against making a Type II error by not cutting rates now, assuming low inflation is temporary. In reality, inflation may stay low, and the output gap could worsen.It added that tariff uncertainties, GDP growth, CPI numbers for FY27, and even the festive season in FY26 are all being frontloaded.