Reduction in Repo Rate by 50 bps: Implications for Home Loan Installments and Debtors
The Reserve Bank of India (RBI) has announced a 50 basis points (bps) reduction in the repo rate, bringing it down from 6.50% to 6.00%. This decision, the first of its kind since the pandemic-era stimulus years, is expected to stimulate housing demand, boost consumption, and provide relief to debt-laden consumers amid persistent inflation and rising living costs.
The repo rate, the interest rate at which the RBI lends money to commercial banks, plays a crucial role in the economy. When the RBI cuts the repo rate, it effectively reduces the cost of borrowing for banks. This, in turn, allows banks to offer lower interest rates on loans, including home loans.
The impact on home loan EMIs and interest rates is significant. A repo rate cut usually leads to a decrease in the interest rates banks charge on home loans. With decreased interest rates, the Equated Monthly Instalments (EMIs) on home loans reduce. For instance, a 0.5% repo cut can result in a monthly EMI drop of approximately Rs 1,500 on a Rs 50 lakh home loan over 20 years.
Borrowers may also choose to retain their EMI amount and reduce the loan tenure, resulting in earlier loan repayment. Recent repo rate cuts have seen faster pass-through to home loan rates, benefiting borrowers sooner.
Home loan rates can even dip below psychologically important thresholds, making loans more affordable for prime borrowers. According to financial analysts, a 50 bps cut in the repo rate can lower EMIs on home loans by Rs 800-Rs 1,000 per month.
The RBI's rate cut is expected to boost real estate demand by making home loans more affordable. However, borrowers with MCLR-linked loans may experience a delayed transmission depending on the bank's reset cycle.
Borrowers with repo-linked loans will see the impact of the rate cut within a few weeks. If your home loan is still linked to MCLR or base rate, it may be a good time to request a switch to a repo-linked loan (may involve a conversion fee).
Updated loan terms for major banks are expected to be effective by the end of June 2025. Major banks such as SBI, HDFC Bank, and ICICI Bank are expected to announce rate reductions shortly.
Senior citizens and fixed-income investors are advised to lock in current FD rates soon, before further rate revisions. Interest rates on bank FDs are also expected to fall due to the lower lending environment.
In summary, the RBI's repo rate cut makes loans cheaper, directly benefiting home loan borrowers through lower EMIs or shorter repayment periods, and generally easing financial burdens. Over a longer tenure, this change can lead to substantial savings for home loan borrowers.
Banks may reduce interest rates on loans following a cut in the repo rate, which is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. This reduction in interest rates could lead to a decrease in Equated Monthly Instalments (EMIs) for home loan borrowers, potentially saving them significant amounts over the loan tenure.
Furthermore, many major banks, such as SBI, HDFC Bank, and ICICI Bank, are expected to announce rate reductions after the RBI's repo rate cut, making home loans more affordable for borrowers.
