RBI’s interest rate cut brings relief to borrowers | Fusion - WeRIndia

The middle class has received another financial boost, following recent income tax cuts, as the Reserve Bank of India (RBI) reduced interest rates by 25 basis points (bps).

This move, announced by the Monetary Policy Committee, will lower EMIs on home, auto, and personal loans, making borrowing more affordable for both existing and new loan holders.

With this revision, the repo rate—the rate at which RBI lends to banks—has come down from 6.50% to 6.25%.

This marks the first rate cut since May 2020, when RBI had lowered rates to 4% due to the COVID-19 crisis.

Over the past two years, the repo rate remained at 6.5%, and this recent reduction signals a shift in monetary policy.

If banks pass on the benefits, borrowers can expect lower EMIs across different loan categories.

Here are some examples:

• A borrower with a ₹50 lakh home loan at 8.5% interest for 20 years would see their EMI drop from ₹43,059 to ₹42,452. This means a monthly saving of ₹607 or ₹7,284 annually. Over time, this can translate to significant long-term savings.
• For a ₹5 lakh personal loan at 12% interest over 5 years, the EMI would reduce from ₹11,282 to ₹11,149, leading to ₹133 monthly savings or ₹1,596 per year.
• A borrower with a ₹10 lakh car loan at 9.5% interest for 7 years will see their EMI drop from ₹16,659 to ₹16,507, resulting in ₹152 savings per month or ₹1,824 annually.

Who Benefits from the Rate Cut?

• Floating Rate Borrowers: Those with home, car, or personal loans on floating rates will benefit as banks adjust their rates.
• New Loan Applicants: Interest rates on fresh loans will be lower, making borrowing cheaper.
• Businesses & Consumers: Reduced borrowing costs may boost spending and investment, positively impacting the economy.

Limitations to Consider:

• Fixed Rate Loan Holders: Those with fixed-rate loans will not see a change in their EMIs.
• Bank Decisions Matter: The actual reduction depends on how much of the repo rate cut banks pass on to consumers. While the Marginal Cost of Funds-Based Lending Rate (MCLR) will likely drop, individual banks set their spread based on market conditions.

Earlier, in December 2024, the RBI had cut the Cash Reserve Ratio (CRR) by 50 basis points, freeing up bank funds for lending.

This latest repo rate cut, if followed by banks, can further stimulate borrowing and provide relief to consumers.

With more RBI policy reviews ahead, borrowers can hope for additional rate cuts, further reducing their financial burden in the months to come.

Image Credit: Anurag Vijay 03, CC BY-SA 4.0, via Wikimedia Commons

Image Reference: https://commons.wikimedia.org/wiki/File:Reserve_Bank_Of_India_-_RBI_Mumbai.jpg