In light of trade tariff pressures imposed by the USA, the Reserve Bank of India is anticipated to lower their key interest rates in order to stimulate economic growth within India.
The Reserve Bank of India (RBI) is set to meet from August 4 to 6, 2025, for its Monetary Policy Committee (MPC) meeting, with a potential 25 basis points (bps) repo rate cut on the table. This anticipated rate cut, often referred to as an "early Diwali" boost, is expected to stimulate economic growth ahead of the festive season in FY26, as was observed in historical data.
Diwali, a major Indian festival, traditionally sees increased consumer spending. A lower interest rate environment, driven by the rate cut, helps drive credit demand during Diwali, which is considered a crucial period for credit growth. By reducing borrowing costs, the rate cut could encourage more credit uptake, particularly in personal loans, where nearly 30 percent of the incremental credit growth from the 2017 rate cut was observed.
This potential rate cut aims to balance inflation control with boosting economic growth. Inflation has remained within the RBI's target band for several months, and maintaining a restrictive policy stance risks causing output losses that are difficult to reverse. On the other hand, a Type II error - failing to cut rates now assuming low inflation is temporary - may prolong low inflation but worsen the output gap.
Central banks have a dual mandate to maintain price stability and support output stabilization. The RBI's decision remains uncertain, with some experts advocating for a pause to observe prior cuts' effects before further easing. Around 90% of economists surveyed expect the RBI to maintain the status quo in August, citing concerns that further rate cuts might push real interest rates too low.
However, the anticipated rate cut is expected to moderately stimulate credit growth and consumer spending during Diwali and provide broader economic support. Credit growth is reported to strongly pick up when an early festive season is preceded by a rate cut. This boost in spending can translate into higher economic activity and support GDP growth.
If implemented, the 25 bps cut would continue the accommodative monetary policy stance, potentially easing liquidity conditions further and supporting credit growth. This could lift consumer sentiment and spending in the short term, particularly aligned with festive seasons like Diwali, when consumer demand typically surges. Over the medium term, such monetary easing could help sustain the economy’s growth momentum amid global slowdown risks.
The State Bank of India (SBI) predicts a 25 bps cut in the repo rate during the MPC meeting. The rate cut decision is influenced by factors like tariff uncertainties, GDP growth, and CPI forecasts for FY27. If the RBI decides to cut the repo rate, it would likely stimulate credit growth and consumer spending, especially during the Diwali season, while providing moderate support to the overall economy.
The anticipated 25 bps repo rate cut by the Reserve Bank of India (RBI) could strengthen the business environment by encouraging more credit uptake, particularly in personal loans, thereby boosting financial growth. With Diwali, a major Indian festival, traditionally seeing increased consumer spending, this rate cut might stimulate consumer spending during the festive season, potentially leading to higher economic activity and supporting GDP growth.
To achieve a balance between inflation control and boosting economic growth, the RBI's decision remains uncertain, with some experts advocating for a rate cut to drive credit and consumer spending, while others suggest a pause to observe prior cuts' effects before further easing.
