RBI can announce 25 BPS interest rate reduction in August to stimulate credit growth prior to Diwali: SBI Report

The Reserve Bank of India (RBI) is expected to announce a repoper of 25 basic points (BPS) in the upcoming meeting of the Monetary Policy Committee (MPC) planned from 5 to 7 August, according to a report from the State Bank of India (SBI).

The report said that a front -hand rate reduction could yield an “early Diwali” in August by stimulating credit growth, especially since the festive season in FY26 is also loaded forward. It added that data from the past show a clear trend, every repo speed that is lowered for Diwali results in higher credit growth during the festive period.

It stated: “We expect RBI to continue with a 25 bps -snit in August policy.” With reference to an example, the report noted that a reduction in the repo rate of 25 BPs in August 2017 led to an incremental credit growth of £ 1,956 billion by the end of Diwali, with almost 30 percent of these in personal loans. It added that Diwali, as one of the largest festivals in India, sees higher consumer expenditures and a low interest environment before Diwali helps improve the demand for credit. ”

Empirical evidence suggests a strong pick -up of credit growth when the party season has been early and preceded a speed reduction, “the report added.

The report emphasized that with inflation now for several months now within the Target Brand of the RBI, continuing with a restrictive policy posture can lead to output losses that are difficult to turn. It said that monetary policy works with a delay and postponing a speed reduction until inflation drops further or growing more visibly slows down can cause deeper and long -term damage to the economy.

“The marginal benefit of waiting is low, while the costs of inactivity in terms of forgive output, investment sentiment will probably be considerable,” the report said. The report further explained that central banks work with a double mandate of price stability and output stabilization.

Referring to the standard quadratic loss function, warned it before making a type II error by not cutting cut percentages now, assuming that low inflation is temporary. In reality, inflation can remain low and the output gap can worsen. It added that rate uncertainties, GDP growth, CPI figures for FY27 and even the festive season in FY26 are all loaded in the front.

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Published on August 2, 2025