In a major relief for the middle class, the Reserve Bank of India (RBI) on Friday reduced the key policy interest rate by 25 basis points (bps), bringing the repo rate down to 6.25% from 6.50%. This marks the first rate cut by the central bank since May 2020 and is expected to lower borrowing costs for home, auto, and personal loans.
The move follows a recent income tax cut, adding to the financial relief for the middle-income segment. With the RBI lowering the key policy rate, banks are expected to pass on the benefit to borrowers by reducing their lending rates.
Impact on Borrowers
The reduction in the repo rate will lead to lower Equated Monthly Installments (EMIs) for borrowers with floating interest rate loans. Here’s how different types of loans will be affected:
Home Loan Example:
For a home loan of Rs 50 lakh at an interest rate of 8.5% for a tenure of 20 years, the EMI impact will be:
Old EMI (8.5%): Rs 43,059
New EMI (8.25%): Rs 42,452
Monthly savings: Rs 607
Annual savings: Rs 7,284
Personal Loan Example:
For a personal loan of Rs 5 lakh at an interest rate of 12% for a tenure of 5 years:
Old EMI (12%): Rs 11,282
New EMI (11.75%): Rs 11,149
Monthly savings: Rs 133
Annual savings: Rs 1,596
Auto Loan Example:
For a car loan of Rs 10 lakh at an interest rate of 9.5% for a tenure of 7 years:
Old EMI (9.5%): Rs 16,659
New EMI (9.25%): Rs 16,507
Monthly savings: Rs 152
Annual savings: Rs 1,824
Who Benefits the Most?
While new borrowers will directly benefit from lower interest rates, existing borrowers with floating interest rate loans will also see a reduction in their EMIs. However, those with fixed-rate loans will not experience any changes in their repayment amounts.
Bank Response and Future Outlook
Banks are expected to respond by reducing their Marginal Cost of Funds-Based Lending Rate (MCLR), which determines the actual interest rates offered to customers. However, the extent of the reduction will depend on each bank’s policy and the transmission of rate cuts.
This development follows the RBI’s decision in December 2024 to cut the Cash Reserve Ratio (CRR) in two tranches of 25 basis points each. The CRR cut, which took effect on December 14 and December 28, helped free up liquidity for banks to extend more loans.
