Reduction of Repo Rate by RBI by 0.5%: Implications for Home Loan Installments and Debtors
In a significant move aimed at boosting economic growth and managing inflation, the Reserve Bank of India (RBI) has reduced the repo rate by 50 basis points, bringing it down to 6.00% - the first such reduction of this magnitude since the pandemic-era stimulus years [1].
This crucial monetary policy tool, the repo rate, determines the interest rate at which commercial banks borrow money from the RBI by selling government securities with an agreement to repurchase them later [2][3]. The decrease in the repo rate is expected to lead to cheaper borrowing for banks, which could potentially lower lending rates and make loans more affordable for borrowers [4].
For home loan borrowers, particularly those with floating-rate loans, this decrease in the repo rate could result in lower Equated Monthly Installments (EMIs) [2][4]. A 50 basis point reduction might decrease the monthly EMI for a ₹50 lakh home loan by approximately ₹1,500 if the interest rate drops from 9% to 8.5% [2]. Over the tenure of the loan, these small reductions can lead to substantial savings on interest payments.
Moreover, a lower interest rate means that a larger portion of each EMI goes towards principal repayment rather than interest, potentially reducing the overall loan tenure [2]. Additionally, lower interest rates can impact tax benefits for homebuyers. While the interest payments are lower, borrowers can still claim deductions on both principal and interest payments under the Income Tax Act [2].
However, banks may delay passing on the full benefits of repo rate cuts to borrowers, leading to a lag in realizing these savings [4]. Borrowers with repo-linked loans will see the impact of the rate cut within a few weeks, while those with MCLR-linked loans may experience a delayed transmission of the rate cut due to their bank's reset cycle. In such cases, it may be beneficial to consider switching to a repo-linked loan (may involve a conversion fee) or refinancing with another bank offering lower rates.
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 [5]. This decision is expected to encourage first-time buyers to enter the property market, support construction and allied industries, contributing to job growth, and lower interest rates on loans extended to customers, including housing, auto, and personal loans [6].
Interest rates on bank Fixed Deposits (FDs) are also expected to fall due to the lower lending environment. Senior citizens and fixed-income investors are advised to lock in current FD rates soon, before further rate revisions.
For millions of home loan borrowers, this decision may translate into lower EMIs and significant interest savings. The new repo rate is expected to boost real estate demand by making home loans more affordable, supporting the economy's recovery. Major banks such as SBI, HDFC Bank, and ICICI Bank are expected to announce rate reductions shortly, with updated loan terms effective by the end of June 2025.
- The decrease in the repo rate may encourage investors interested in real-estate, as home loans could become more affordable, potentially boosting demand in the market.
- Lower interest rates on fixed deposits might necessitate senior citizens and fixed-income investors to lock in the current rates before any further revisions.
- With lower lending rates, businesses involved in personal-finance, such as banks, may see a surge in demand for loans beyond home loans, including auto and personal loans, promoting job growth.
