Reduction of Repo Rate by RBI by 0.5%: Implications for Home Loan Installments and Borrowers
The Reserve Bank of India (RBI) has made a significant move by reducing the repo rate by 50 basis points, bringing it down to 6.00%. This decision is set to benefit home loan borrowers and stimulate economic growth across various sectors.
For Home Loan Borrowers
The repo rate cut directly impacts home loan borrowers by lowering interest rates, resulting in reduced Equated Monthly Installments (EMIs) and borrowing costs. This move benefits consumers and stimulates economic activity.
New floating-rate home loans are linked to the repo rate, meaning that a repo rate cut leads banks to reduce their lending rates. A 100 basis points (bps) repo rate cut can save a borrower with a Rs 50 lakh, 20-year home loan up to Rs 14.78 lakh in interest and reduce the tenure by several months if EMIs are maintained, or provide substantial monthly savings if EMIs are reduced instead.
A recent 50 bps cut brought repo rates down to 5.5%, enabling large loans of Rs 1 crore to see significant EMI reductions, making home ownership more affordable. Banks have responded by lowering home loan rates to as low as 7.49%, improving affordability further.
For instance, a Rs 50 lakh loan over 20 years at 7.49% interest saves about Rs 3,142 monthly compared to an 8.5% rate prior to the cut. Lower rates also increase borrowers' ability to qualify for larger loans, thereby enabling purchase of better or bigger homes.
Several major banks, including Bank of Baroda, SBI, HDFC Bank, ICICI Bank, and Punjab National Bank, have already passed these rate cuts on to customers, sometimes alongside waived processing fees and promotional offers, to boost housing demand.
Advice for Home Loan Borrowers
Borrowers with floating interest rates linked to the repo rate will see the impact within a few weeks. However, if a home loan is still linked to MCLR or base rate, it is advisable for the borrower to request a switch to a repo-linked loan (may involve a conversion fee) or refinance the loan with another bank offering lower rates. Borrowers are advised to monitor their bank's announcements, check revised amortization schedules, and consider refinancing if they are not getting full benefit from the rate cut.
For the Broader Market
The repo rate cut aims to stimulate economic demand and reduce inflationary pressures by lowering borrowing costs across sectors. By reducing home loan rates, the RBI encourages increased home buying, which can trigger a credit boom in the real estate sector, supporting growth in housing, construction, and related industries. This increased activity spreads to the wider economy, boosting jobs and consumption.
Lower rates can also make existing loans cheaper, increasing disposable income for households and potentially shifting savings into investments or consumption. The repo rate cut is expected to support construction and allied industries, contributing to job growth. The cut is also expected to boost real estate demand by making home loans more affordable.
Pro-Growth Signal
Market analysts see this as a pro-growth signal, particularly supportive for the affordable and mid-segment housing market. Interest rates on bank FDs are expected to fall due to the lower lending environment. Major banks such as SBI, HDFC Bank, and ICICI Bank are expected to announce rate reductions by the end of June 2025.
Senior citizens and fixed-income investors are advised to lock in current FD rates soon, before further rate revisions. Borrowers with MCLR-linked loans may experience a delayed transmission depending on the bank's reset cycle.
The RBI Governor, Shaktikanta Das, emphasized that the move aims to balance growth with inflation management, noting that core inflation has eased, allowing for some monetary flexibility. Cheaper borrowing for banks allows them to lower interest rates on loans extended to customers.
In conclusion, an RBI repo rate cut benefits home loan borrowers through lower interest costs, greater affordability, and flexibility in loan repayment, while also encouraging broader economic growth by stimulating demand in the housing market and beyond.
- The repo rate cut also has implications for the broader market, as it aims to stimulate economic demand and reduce inflationary pressures by lowering borrowing costs across various sectors.
- The RBI's decision to lower the repo rate can boost the growth of the real estate sector, triggering a credit boom and supporting jobs and consumption in housing, construction, and related industries.
