RBI Likely to Cut Repo Rate by 25 bps in August to Push Credit Growth Ahead of Diwali: SBI Report

The Reserve Bank of India (RBI) may lower the repo rate by 25 basis points (bps) in the next Monetary Policy Committee (MPC) meeting, which is set to take place between August 5 and 7, according to a report released by the State Bank of India (SBI).

The report explained that cutting the rate early in August could help boost loan growth ahead of the festive season, which comes earlier in FY26. It added that past trends show whenever the RBI cuts rates before Diwali, credit growth improves during the festive period.

"We believe RBI may frontload with a 25 basis points cut in the August policy review," the report stated.

Festive Season Rate Cuts Show Strong Impact

Giving an example from the past, the report said that a 25 bps rate cut in August 2017 had led to an extra credit growth of Rs 1,956 billion by Diwali, with nearly 30% of that amount in personal loans. It noted that Diwali, being a major festival, leads to a rise in spending, and a drop in interest rates before the festival helps support higher borrowing and demand.

According to the report, there is strong proof that whenever the festive season comes early and is supported by a rate cut, credit demand picks up sharply.

Delay in Action Could Harm the Economy

The report pointed out that inflation has remained within the RBI’s target range for a few months now. Keeping a tight policy in such a situation might result in a drop in economic output, which is not easy to recover.

It further said that since monetary policy decisions take time to show results, delaying the rate cut until inflation falls further or growth slows down more could hurt the economy even more in the long run. "The benefit of waiting is small, but the risk of doing nothing could be large, especially when it affects investment and production," the report explained.

Warning Against Policy Mistakes

The SBI report also highlighted that central banks must balance price control with economic growth. Referring to a common policy model known as the quadratic loss function, the report warned that not cutting rates now could be a serious mistake if the belief that low inflation is only temporary turns out to be wrong. If inflation remains low while the economy slows, the situation could worsen. It also noted that many factors, such as trade tariffs, economic growth, inflation figures for FY27, and even the festive calendar for FY26, are happening earlier than usual. This, the report said, is another reason why the RBI should consider acting early.