RBI Expected to Cut Rates in August, Aiming to Accelerate Credit Growth Before Festive Season

Rate Cut on the Cards? RBI May Lower Rates to Boost Festive Credit Growth

Mumbai, August 2, 2025:
In a development that could significantly influence economic sentiment ahead of the festive season, the Reserve Bank of India (RBI) may announce a 25 basis points (bps) rate cut in its upcoming August policy meeting to help accelerate credit growth, according to a research report by the State Bank of India (SBI). The SBI report emphasizes that boosting credit growth at this stage could be crucial for sustaining consumer demand and business expansion, especially as Diwali approaches.

The report highlights that India’s economic growth has shown signs of slowing after a strong surge in the last two years. With inflation easing and macroeconomic indicators stable, the report argues that a moderate rate cut could support fresh momentum in credit growth.

Diwali season and its impact on credit growth:

Historically, the months leading up to Diwali have always been a turning point for credit growth, driven by increased demand for housing loans, auto loans, and retail credit. Businesses also rely on this period to secure new financing to prepare for higher sales volumes.

The SBI report explains that a timely rate cut would directly contribute to stronger credit growth, encouraging both consumers and businesses to borrow and spend. “A 25 bps cut could serve as a psychological boost, encouraging borrowers who have postponed decisions to re-enter the market, thus directly impacting credit growth,” it states.

Current economic backdrop:

India’s GDP has remained strong, but this growth has been tapering slightly from its earlier double-digit rates. The slowdown in this growth is partly attributed to higher borrowing costs after the RBI increased rates over the past two years to curb inflation.

With headline inflation moderating to 4.2% in June 2025, the SBI report believes the RBI has room to shift its focus toward reviving this growth in credit without undermining financial stability. “The balance of risks now favors policies that encourage healthy growth to support economic activity,” the report adds.

Market response and industry perspective:

Financial markets reacted positively to the report’s findings, anticipating that a rate cut would spur new lending and stimulate this economic growth. Banking stocks saw modest gains, reflecting investor confidence that improved growth could translate into higher earnings for lenders.

A senior economist at SBI noted, “While a 25 bps rate cut is modest, its real value lies in its ability to revive market confidence and encourage sustained credit growth over the coming months.”

The importance of it for businesses and consumers:

For consumers, this boost could make home and auto loans more affordable, lowering monthly EMIs and encouraging spending on big-ticket items. Businesses, particularly SMEs, rely on robust credit growth to finance inventory, hire workers, and expand operations ahead of the festive season.

According to the SBI report, even a slight improvement in this growth can create positive economic spillovers, supporting job creation and consumer sentiment. RBI’s cautious stance and the road ahead.

Despite clear benefits to this growth, the RBI has so far maintained a cautious approach, keeping the repo rate steady at 6.50% over the last three meetings. Policymakers have cited inflation risks and external economic uncertainties as reasons for restraint. However, with inflation showing signs of sustained moderation, experts believe the RBI could now focus more actively on boosting credit growth to sustain economic recovery. The report concludes by stating that robust credit growth remains a cornerstone of India’s economic strategy. “Encouraging credit growth ahead of Diwali will not only benefit consumers and businesses but also support the broader goal of inclusive growth,” it says.

As the monetary policy committee prepares to meet in August, all eyes are on whether the RBI will act to strengthen credit growth through a rate cut — a move that could define economic momentum for the rest of the year.

Ultimately, the push for stronger credit growth aligns with market hopes and policy goals: ensuring that as India celebrates Diwali, the economy benefits from renewed lending and robust credit growth across sectors.