How RBI Repo Rate cut in August could bring early Diwali for borrowers, banks: SBI Research explains

All eyes are on the Reserve Bank of India (RBI) as its Monetary Policy Committee (MPC) meets this week to decide on the interest rate policy amid global tariff uncertainty, low inflation, and a narrowing gap between the real and nominal GDP.

Ahead of the meeting starting on Monday (August 4, 2025) till August 6, 2025, SBI Research has predicted that frontloading another repo rate cut of 25 bps in August itself could bring an early Diwali this year.

"We have analyzed past trends of credit growth around Diwali period with respect to repo rate cut. We found that any repo rate cut ahead of Diwali boosts credit growth more vigorously till Diwali," SBI Research said in a report titled Prelude to MPC Meeting: August 4-6, 2025

"For example, a 25-bps repo rate cut in Aug’17 resulted in an incremental credit growth of Rs 1956 billion till the ending of Diwali, of which almost 30% in personal loans," it added.

Since February 2025, the RBI has already reduced the repo rate by 100 bps (1%), bringing cheers to borrowers as well as banks whose credit books have improved.

While the interest rate of home loans linked to an external benchmark (EBLR) like the repo rate has declined by around 1% since February, banks have also seen an uptick in demand for home loans.

"RBI has slashed repo rate by 100 bps in last months (since Feb’25) and the home loan rate linked to EBLR has also declined by the same magnitude. This we believe has given fillip to the home loan portfolios of banks," the report said."

SBI Research insights ahead of RBI MPC meeting

As far as the speed of reducing the lending rates is concerned, public sector banks have been faster compared to private sector banks.

"In the current easing phase (Feb-June 2025), in response to the 100 bps cut in policy repo rate, banks have revised their repo-linked EBLRs up by same magnitude. While many banks have reduced their MCLR rates in the range of 10-65 bps, despite having a longer reset period and is referenced to the cost of funds. PSBs reduced lending rates faster than Pvt banks," the report said.

SBI Research has also given four reasons why the RBI should frontload repo rate cut in August itself instead of waiting for the future

• Inflation: Already at a 77-month low of 2.10% and likely to decline even further

• India–US trade deal is now quite uncertain and thus delaying the rate cut could add to uncertainty. Cutting rates now would send a clear signal and reduce confusion at a time when external changes are completely unexpected

• If inflation later rises, the central bank may have to tighten, which would compound the output gap that could have been narrowed earlier through timely easing

• Rate cut now will minimise the Central Bank Loss Function

Please note that the SBI Research's prediction may or may not come true. The outcome of the RBI MPC meeting starting on August 4 will be declared on August 6 (Wednesday).