The Reserve Bank of India is expected to announce a 25 basis point cut in the repo rate during its upcoming Monetary Policy Committee meeting in August, according to a report by SBI Research. The anticipated move comes amid soft inflation trends and global uncertainties, with the central bank aiming to reinforce growth momentum while a policy window remains open.
SBI Research stated that the rate cut would be frontloaded, aligning with early indicators such as tariff uncertainty, improved GDP growth projections, and favorable consumer price index figures for FY27. The report suggested that a frontloaded rate cut could deliver an “early Diwali” by accelerating credit growth, especially with the festive season in FY26 also expected to be frontloaded.
Empirical evidence cited in the report indicates a strong uptick in credit growth when the festive season arrives early and is preceded by a rate cut. The report cautioned against delayed policy action, warning that central banks risk committing a Type II error by assuming inflation undershoots are temporary and refraining from rate cuts. In such cases, inflation may persistently remain low while the output gap continues to widen.
The report highlighted that the new CPI series, which places greater emphasis on e-commerce and less on food, could result in average CPI inflation staying below 4 percent even through FY27. This trend supports the case for frontloading better inflation figures as well.
Central banks, the report noted, are tasked with maintaining price stability and supporting economic growth. It emphasized that according to the standard Quadratic Loss Function, failing to act now could worsen the economic slowdown if inflation remains subdued longer than expected.
The report concluded that policymakers are factoring in key variables such as tariff changes, GDP growth, inflation projections for FY27, and the timing of the festive season in FY26 earlier than usual, reinforcing the case for a proactive rate cut.
