RBI MPC August 2025: Will The Central Bank Announce A Festive Rate Cut Ahead Of Diwali?

The report argues that an August rate cut would “bring an early Diwali” by stimulating credit growth ahead of the festive season, which is expected to arrive earlier in FY26.

SBI analysts noted that past policy actions show a clear link between pre-Diwali rate cuts and stronger festive borrowing.

Source : ABPLIVE AI

The Reserve Bank of India (RBI) could lower the repo rate by 25 basis points (bps) during its Monetary Policy Committee (MPC) meeting from 4–6 August, a State Bank of India (SBI) report has suggested.

The report argues that an August rate cut would “bring an early Diwali” by stimulating credit growth ahead of the festive season, which is expected to arrive earlier in FY26, reported ANI.

Frontloading Policy to Boost Festive Lendin

SBI analysts noted that past policy actions show a clear link between pre-Diwali rate cuts and stronger festive borrowing. “We expect RBI to continue frontloading with a 25 bps cut in August policy,” the report said, highlighting how lower borrowing costs can drive demand in sectors such as retail, auto, and housing.

It cited the August 2017 repo rate reduction of 25 bps, which triggered an incremental credit expansion of Rs 1,956 billion by the end of that year’s Diwali season, with personal loans accounting for nearly 30 per cent of the increase. The report added that Diwali remains one of India’s largest consumption periods, and easing rates beforehand typically amplify spending.

Inflation Comfort and Risks of Delay

According to SBI, inflation has stayed within the RBI’s target band for several months, making the case for a shift in stance. The report warned that keeping policy too tight for too long risks “output losses, which are hard to reverse.”

It emphasised that monetary policy effects are felt with a lag, meaning postponing action until growth slows sharply or inflation falls further could “cause deeper and long-lasting damage to the economy.” The report further argued that the “marginal benefit of waiting is low,” while the cost of inaction could hurt output and investment sentiment.

Referencing the Quadratic Loss Function used by central banks, SBI cautioned against a “Type II error”—delaying cuts because of the assumption that low inflation is fleeting. It added that tariff uncertainties, GDP growth trends, CPI data for FY27, and even the early festive season this year all support the case for a prompt policy move.