The Reserve Bank of India (RBI) has made headlines with its recent decision to cut the repo rate by 25 basis points to 6.25%, representing the first reduction of its kind since May 2020. This pivotal step is expected to lower home and auto loan EMIs, providing welcome relief to millions of borrowers across the nation. By making borrowing cheaper, experts anticipate the rate cut will stimulate economic activity and boost consumption, particularly among middle-class families.
The RBI’s six-member Monetary Policy Committee (MPC) arrived at this decision at its meeting last week, which follows nearly five years of consistent rate hikes. The rate was increased from May 2022 through February 2023 from 4% to 6.50%, as part of the RBI's strategy to combat inflation. After maintaining the rate at 6.50% for eleven consecutive meetings, the recent decision to lower it reflects the easing economic conditions.
Experts, including Kanika Singh, Chief Risk Officer of IMGC (India Mortgage Guarantee Corporation), view the repo rate cut alongside the recent Union Budget's provisions — including zero tax for incomes under ₹12 lakh — as beneficial for the economy. “Timely transmission of the rates will be key to make loans affordable,” she stated, highlighting the importance of how financial institutions manage rate adjustments.
But what does this mean for homebuyers? For first-time buyers, every little bit helps. Take, for example, someone taking out a home loan of ₹25 lakh over 20 years. Before the repo rate cut, the interest rate was 9%, resulting in monthly EMIs of ₹22,493. With the new reduction, the EMI drops to ₹22,093, leading to monthly savings of ₹400. While this may seem modest initially, over the entire loan tenure, the cumulative savings can amount to approximately ₹1 lakh, based solely on interest reductions.
The middle class certainly stands to gain substantially from these adjustments. A salaried individual with a gross income of ₹25 lakh and a home loan of ₹50 lakh over 20 years can expect savings of about ₹1.37 lakh for the financial year 2025-26. These savings stem from both the rate cut and tax relief measures announced earlier, indicating multiple fronts of financial relief.
It’s important to note how banks adapt their policies. Currently, most financial institutions link home loan interest rates to external benchmarks. This means any changes to the repo rate are likely to directly affect loan interest rates. After the RBI's decision, banks have already begun to adjust their lending rates accordingly, catering to the expectations of potential borrowers.
“Borrowers across India, including those with auto loans and MSMEs, will likely receive some reprieve,” said financial analyst Raghvendra Nath from Ladderup Wealth Management Pvt Ltd. He anticipates caution from the RBI moving forward, factoring global economic uncertainty and domestic inflation pressures. The RBI’s predictive models, estimating growth at 6.7% and inflation at 4.2% for FY26, underline the delicate balance between stimulating the economy and managing inflation.
For auto loan borrowers, similar savings apply. Should the banks pass on the rate cut, someone with a ₹10 lakh car loan at 9.4% may see their interest rate decline by the same 25 bps, translating to significant annual savings on their loan payments. This cascading effect highlights the interconnectedness of various loan products to the introduction of lower interest rates.
RBI officials assure borrowers of the impact timeline. Deputy Governor Swaminathan J noted, “Since 40% of the home loan book is linked to External Benchmark Lending Rates (EBLR), this segment of loans will have immediate impacts.” For mortgages tied to Marginal Cost of Funds-based Lending Rates (MCLR), borrowers might have to wait as long as six months to fully experience the benefits of this rate cut.
The recent developments have garnered attention from multiple sectors, signaling both renewal confidence for homebuyers and cautious optimism among financial analysts. The timing of this repo rate cut, arriving after major legislative changes like the new income tax slabs, suggests the government is proactive about rejuvenation efforts post-pandemic.
Looking forward, the anticipation among experts is building. If the RBI chooses to continue this trend of rate cuts, the potential for lower mortgages and increased home purchases could mark a significant shift in India’s housing market. Nevertheless, future rate cuts cannot be taken for granted, as variables such as global economic performance and domestic conditions will play pivotal roles.
Overall, as interest rates drop, the overall outlook for homebuyers and borrowers is improving. They are now presented with unprecedented opportunities to purchase homes with much more manageable financial commitments. This shift may lead to higher homeownership rates and rekindle growth momentum within the real estate sector.