EMIs to Fall First Time in Last 5 Years as RBI Cuts Repo Rate by 25 Basis Points

The Reserve Bank of India (RBI) has announced a 25 basis points (bps) reduction in the repo rate, bringing it down from 6.5% to 6.25%. This move by the Monetary Policy Committee (MPC) aims to provide relief to consumers struggling with inflation and rising living costs. The repo rate cut is expected to lower borrowing costs, making loans cheaper for individuals and businesses.

What Is the RBI Repo Rate Cut?

The repo rate is the interest rate at which the RBI lends money to commercial banks. This latest cut marks the first reduction since May 2020. The six-member MPC unanimously decided to lower the rate to encourage borrowing, spending, and investments, thereby stimulating economic growth.

As banks receive funds at a lower rate from the RBI, they are likely to pass on the benefit to customers by reducing interest rates on various loans. This means that equated monthly installments (EMIs) for home, personal, car, and MSME loans could become more affordable.

How Will the Repo Rate Cut Reduce Loan EMIs?

Since most bank loans are linked to an external benchmark rate, including the RBI’s repo rate, any change in this rate directly affects lending rates. With the reduction in repo rate, interest rates on loans are expected to decrease, potentially lowering EMIs for borrowers. However, the extent of the reduction depends on individual bank policies, as they may choose to pass on the benefit fully or partially to their customers.

Impact on Loan Repayments: A Practical Example

Consider a home loan of Rs 50 lakh at an interest rate of 8.75% with a 20-year tenure. Before the repo rate cut, the EMI stood at Rs 44,186 per month. If banks pass on the full 25 bps rate cut, the new EMI would be reduced to Rs 43,391 per month. This results in an annual saving of Rs 9,540 for the borrower.

What This Means for Borrowers

With lower borrowing costs, individuals planning to take personal, home, or car loans could benefit from reduced EMIs. Additionally, existing loan borrowers on floating interest rates may see a decrease in their repayment burden, depending on how banks adjust their rates.

As financial institutions revise their lending rates in response to the repo rate cut, consumers are advised to compare loan offers and choose the best option available. This move by the RBI is expected to enhance liquidity, support economic growth, and provide much-needed financial relief to borrowers.