Reduction of Repo Rate by 50 basis points by RBI: Implications for Home Loan Installments and Borrowers
The Reserve Bank of India (RBI) has reduced the repo rate by 50 basis points, bringing it down from 6.50% to 6.00%. This move is expected to significantly benefit home loan borrowers with floating interest rates linked to external benchmarks like the repo rate.
For borrowers with such loans, this decision translates into lower Equated Monthly Installments (EMIs) and significant interest savings. According to financial analysts, a 50 bps cut in the repo rate can lower EMIs on home loans by ₹800-₹1,000 per month, depending on the loan amount and tenure.
For instance, for a loan amount of ₹50 lakh over a tenure of 20 years, a drop from 9% to 8.5% interest rate results in a monthly EMI drop from ₹44,986 to ₹43,391, leading to monthly savings of ₹1,595 and total interest savings of ₹7.71 lakh over the entire loan term.
The RBI Governor, Shaktikanta Das, emphasized that the move aims to balance growth with inflation management, noting that core inflation has eased, allowing for some monetary flexibility. This rate cut is expected to stimulate housing demand, boost consumption, and provide relief to debt-laden consumers amid persistent inflation and rising living costs.
Market analysts see this as a pro-growth signal, particularly supportive for the affordable and mid-segment housing market. The repo rate cut is also expected to support construction and allied industries, contributing to job growth.
However, it's important to note that the benefits are mostly immediate and significant for floating-rate loans directly linked to the repo rate or the Repo Linked Lending Rate (RLLR). Loans tied to other benchmarks such as Marginal Cost of Funds based Lending Rate (MCLR) may take longer or show slower adjustment following repo rate cuts.
Borrowers are advised to monitor their bank's announcements, check revised amortization schedules, and consider refinancing if they are not getting full benefit from the rate cut. Major banks such as SBI, HDFC Bank, and ICICI Bank are expected to announce rate reductions by the end of June 2025.
Interest rates on bank Fixed Deposits (FDs) are expected to fall due to the lower lending environment. However, senior citizens and fixed-income investors are advised to lock in current FD rates soon, before further rate revisions.
Overall, the repo rate acts as a crucial policy tool influencing home loan interest rates. A reduction in the repo rate lowers banks’ borrowing costs and leads to lower home loan rates, thereby decreasing EMIs and enhancing loan affordability for borrowers.
[1] The Hindu BusinessLine [2] Financial Express [3] The Economic Times [5] Livemint
- This reduction in the repo rate by the Reserve Bank of India (RBI) could have a positive impact on personal-finance, as lower home loan interest rates may lead to significant interest savings for those with floating-rate loans.
- Businesses in the housing sector might also benefit from the RBI's decision, as the lower repo rate can stimulate housing demand, boost consumption, and provide relief to debt-laden consumers, ultimately contributing to job growth and supporting the affordable and mid-segment housing market.