RBI is expected to cut 25 bps in repo rates in light of soft inflation and global uncertainties, aiming to reinforce growth momentum while it has a policy window, a report said on Saturday. We expect the RBI to continue frontloading with a 25 basis point cut at its August MPC meeting. Tariff uncertainty, better GDP growth and CPI numbers in FY27 are all frontloaded, SBI Research said in a report.
A frontloaded rate cut in August could bring an “early Diwali” by boosting credit growth, especially as the festive season in FY26 is also frontloaded, it said. According to the report empirical evidence suggests a strong pick up in credit growth whenever the festive season has been early and has been preceded with a rate cut.
The report suggested that policymakers at central banks should avoid missing the window for effective intervention by acting too late, saying, “No point in backloading or committing a type II error.”
A Type II error occurs when the central bank fails to reject the null hypothesis, assuming that the inflation undershoot is temporary, and hence does not cut rates—but in reality, inflation remains persistently low and the output gap continues to weaken.
“The good news is that the new CPI series, which gives more weightage on e-commerce and less weightage on food, could imply average CPI inflation continuing to undershoot, staying below 4 per cent even in FY27,” the report added. As a result, better inflation figures for FY27 will also be frontloaded.
The report said that central banks focus on two main goals — keeping prices stable and supporting economic growth. It explained that, according to the standard Quadratic Loss Function, there is a risk of making a “Type II error” — in this case, not cutting interest rates now because policymakers think low inflation is temporary. But in reality, inflation might remain low, and the slowdown in the economy could get worse.
The report also noted that factors like tariff changes, GDP growth, inflation numbers for FY27, and even the festive season in FY26 are being taken into account earlier than usual.
