SBI Calls for 25 bps Cut: Can RBI’s Action Set Off an Early Diwali Boom?

As India gears up for its peak festive season, all eyes are on the Reserve Bank of India (RBI)—and the State Bank of India (SBI) is sounding the alarm. With the Monetary Policy Committee (MPC) set to meet from August 4 to 6, SBI has strongly urged the RBI to slash interest rates by 25 basis points (bps), arguing that delaying this decision could be a costly economic misstep.

Why Now? India’s Inflation at a Historic Low

India’s current Consumer Price Inflation (CPI) stands at 2.1%, a 77-month low and the softest reading since 2018. Forecasts suggest this could fall even further, with SBI projecting the average for fiscal year 2026 to settle between 2.7% and 2.9%—far below the RBI’s own 3.7% estimate. This remarkable cooling isn’t isolated to vegetables; cereal, pulses, and protein prices are also tumbling, giving policymakers more flexibility for a rate cut.

The Case for Immediate Action

SBI’s research report warns: “We’re living in a frontloaded world.” Their argument? If the RBI hesitates now, it could make what economists call a “Type II error”—failing to act when current low inflation is, in fact, sustainable and persistent. Waiting too long while output weakens, they warn, could risk missing an opportunity to boost the economy before the festive demand surge.

What’s at Stake: Early Diwali Boom

Festivals like Diwali have always kicked off a wave of spending across India.

RBI

According to SBI, a pre-Diwali rate cut could fire up personal loans, retail credit, and consumer sentiment—just as it did back in 2017. Past data shows that home and retail loans respond swiftly to RBI’s rate decisions, with signs of a demand uptick shortly after repo rate cuts.

Example Signals from Previous Years

• 2017: Festive consumption soared after a surprise rate cut.

• Post-February’s 100 bps repo cut: Home loan trends broke upward, highlighting borrower sensitivity to RBI moves.

Warning Signs: Credit Growth, Corporate Shifts, and Margin Pressures

On the flip side, SBI notes several signals that immediate easing is needed:

• Muted credit growth: Corporates are turning to bond markets and commercial paper instead of traditional bank borrowing.

• Deposit growth outpaces lending: This means banks’ profit margins from lending are under threat.

• Loan-deposit mismatch: If the trend continues, it could destabilize the sector’s equilibrium.

SBI’s Proposed Bold Moves

The nation’s largest lender isn’t just pushing for a rate cut—it wants comprehensive reforms:

• Link NBFC lending rates to an external benchmark for better transparency.

• Allow floating deposit rates to improve monetary policy transmission—so that changes actually reach end borrowers and savers quickly.

“It’s Time for the RBI to Go All In”

SBI’s message is unambiguous: “Cut now, or risk digging a deeper economic hole.” The report underscores that inaction, especially before festivals, could have far-reaching consequences on both consumption demand and banking sector health.

What It Means for You

• For Consumers: Lower borrowing costs on home and personal loans, and a likely boost in festive shopping offers.

• For Investors: A rate cut could buoy stock market sentiment, especially in retail, banking, and FMCG sectors tied to consumer spend.

• For Businesses: Easier access to credit may jumpstart expansion, inventory ramp-ups, and hiring to cater to festive demand.

Final Word

With inflation subdued and room to maneuver, the stage is set for the RBI to ignite India’s “early Diwali boom”. SBI’s clarion call is as much a warning as an opportunity—act now, and the festival of lights could shine brighter for India’s economy