Diwali, being one of India’s major festivals, typically sees increased consumer spending, and a lower interest rate environment helps drive credit demand during this crucial period. The report highlights that credit growth strongly picks up when an early festive season is preceded by a rate cut.
It also notes that inflation has remained within RBI’s target band for several months, so maintaining a restrictive policy stance risks causing output losses that are difficult to reverse. Monetary policy effects come with a lag; thus, waiting for inflation to decline further or visible growth slowdown before cutting rates could harm the economy more severely. The report suggests that the cost of inaction is significant, while the marginal benefit from waiting is limited.
Furthermore, central banks have a dual mandate to maintain price stability and support output stabilization. The report warns against a Type II error — failing to cut rates now assuming low inflation is temporary — which may prolong low inflation but worsen the output gap.
In summary, with factors like tariff uncertainties, GDP growth, CPI forecasts for FY27, and the early festive season in FY26 all frontloaded, RBI’s anticipated 25 bps repo rate cut aims to balance inflation control with boosting economic growth and credit expansion before the important Diwali period.
