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RBI Repo Rate Cut: Banks will pass on the rate cut benefit to those existing borrowers who took loans under the repo rate-linked floating interest rate system.
The RBI has announced a repo rate cut by 25 basis points (bps) for the first time in around five years. Will stands to gain?
RBI Repo Rate Impact: Even as the Reserve Bank of India on Friday announced a repo rate cut by 25 basis points (bps) first time in around five years, the loan costs are going to be slashed for borrowers. Their EMIs will also be reduced. This good news for the middle class comes days after the government cut income tax rates in the Union Budget 2025-26.
The Reserve Bank of India’s (RBI) Monetary Policy Committee on Friday announced a 25 basis point cut in the repo rate to 6.25 per cent. The stance remains the same as ‘neutral’.
RBI Repo Rate Cut: Who Stands to Gain?
The following borrowers will benefit by the RBI’s repo rate cut:
Floating Interest Rates:
Banks will pass on the rate cut benefit to those existing borrowers who took loans or have converted the loans under the repo rate-linked floating interest rate system. The floating interest rate system allows EMIs to adjust as per the RBI’s repo rate. As the RBI cuts interest rates, these rates come down.
On the other hand, those who took home loan, personal loan, auto loan under the fixed interest rate system.
HDFC Life Insurance’s Keki Mistry said, “It depends upon the banks as to how much they will pass on. But, most loans have already been converted to the repo rate regime. There are very few loans that are based on old benchmark (fixed regime).”
New Borrowers:
New borrowers who will take loans after few weeks will be able to get the lower interest rates on loans.
Importantly, the RBI has just started interest rate cut which will continue for the new few months. In the subsequent monetary policy reviews also, the RBI MPC is expected to cut further rate cuts.
In the previous policy review in December 2024, the RBI had cut the Cash Reserve Ratio (CRR) in two tranches of 25 basis points each, with effect from December 14 and December 28. CRR is the percentage of a bank’s total deposits that must be kept in cash with the RBI. A lower CRR frees up amount for banks to give that as a loan.
How Much Will You Save?
Let’s look at an example. Say you have a home loan of Rs 50 lakh at an interest rate of 8.5% for a tenure of 20 years. With the 25 basis points rate cut, your interest rate would drop to 8.25%. Here’s how that impacts your monthly EMI:
- Old EMI (at 8.5%): Rs 43,059
- New EMI (at 8.25%): Rs 42,452
So, you save about Rs 607 every month. Over the course of a year, that’s a savings of Rs 7,284!
This might not seem like a huge amount for some, but for many borrowers, every bit helps, especially when you factor in the long-term benefits over a 20- or 30-year loan term. This will also be reduced in the subsequent RBI MPC policy meetings.
