RBI Cuts Repo Rate to 6.25% for 1st Time in 5 Years, Bringing Relief to Home Loan Borrowers
RBI lowers repo rate to 6.25% after five years, easing home loan EMIs, boosting credit demand, and supporting economic recovery
RBI – Home Loan – Relief to Home Loan Borrowers – RBI Repo Rate Cut – TAXSCAN
RBI – Home Loan – Relief to Home Loan Borrowers – RBI Repo Rate Cut – TAXSCAN
After maintaining a prolonged pause on interest rate cuts, the Reserve Bank of India ( RBI ) has finally reduced the repo rate by 25 basis points, bringing it down from 6.5% to 6.25%. This marks the first repo rate cut in five years, signaling a shift in the central bank’s monetary policy stance.
The decision was taken during the 53rd meeting of the Monetary Policy Committee ( MPC ), chaired by RBI Governor Sanjay Malhotra, where the committee unanimously voted for the rate cut. The Standing Deposit Facility ( SDF ) rate has been lowered to 6.0%, and the Marginal Standing Facility ( MSF ) rate and the Bank Rate have been adjusted to 6.5%.
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This is expected to bring relief to borrowers, particularly those with floating-rate home loans, by reducing EMIs and making borrowing more affordable.
Why Has the RBI Cut the Repo Rate?
The RBI’s decision comes amid moderating inflation and slower-than-expected economic growth. The central bank had held off on rate cuts since 2020, citing inflationary pressures and global economic uncertainties. With headline inflation easing and GDP growth projected at 6.7% for 2025-26, the RBI found policy space to support economic expansion through lower borrowing costs.
How Does the Repo Rate Cut Impact Home Loans?
The repo rate directly influences interest rates on loans, particularly home loans. When the RBI lowers the repo rate, banks and financial institutions typically reduce their lending rates, making loans cheaper. This means:
- Lower EMIs for existing borrowers with floating-rate loans.
- More attractive borrowing conditions for new homebuyers.
Since October 1, 2019, all new floating-rate loans have been linked to an external benchmark, which in most cases is the repo rate. This means that when the repo rate is cut, borrowers with such loans automatically benefit from lower interest rates.
With the majority of home loans in India tied to floating interest rates, this reduction is set to ease financial burdens for homeowners.
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How Much Will Borrowers Save?
According to CNBC TV18, the CEO of BankBazaar, Adhil Shetty said that the rate cut could result in huge savings for home loan borrowers.
- A borrower with a 20-year home loan at 8.75% who has already paid 12 EMIs by March will see a Rs. 28,417 per lakh reduction in total interest payments due to the 25 bps repo rate cut.
- On a Rs. 50 lakh loan, which amounts to Rs. 4.20 lakh in total savings over the tenure and will reduce the loan period by 10 EMIs.
Shetty also advises borrowers to explore refinancing options for even greater savings:
- If a borrower refinances their loan from 8.75% to 8.25% (a 50 bps reduction), they could save Rs. 14,480 per lakh over the remaining tenure.
- This would result in nearly 15% savings per lakh borrowed, making refinancing an attractive option.
Shortly after the RBI’s announcement, Ashwani Kumar Tiwari, Managing Director of State Bank of India ( SBI ), confirmed that SBI will lower interest rates on housing and auto loans. He stated that the policy decision was expected, and the bank is committed to ensuring that borrowers benefit from the rate cut. Other major banks are also expected to adjust their lending rates in the coming weeks, providing further relief to consumers.
Apart from the repo rate cut, here are the other important highlights from the policy meeting:
Growth and Inflation Outlook
India’s GDP growth for 2024-25 is projected at 6.4%, with 2025-26 expected to grow at 6.7%. Growth is supported by robust private consumption, higher government capital expenditure, and strong business sentiment. However, global risks such as geopolitical tensions and financial market volatility remain concerns.
Inflation, which peaked at 6.2% in October 2024, has been softening in recent months, driven by falling food prices. CPI inflation for 2024-25 is projected at 4.8%, while for 2025-26, it is expected to be around 4.2%. The RBI believes that strong food production and monetary policy actions will help moderate inflation further.
Rationale for Monetary Policy Decisions
The MPC noted that inflation is gradually aligning with its target, while growth remains below last year’s levels. With the repo rate cut, the RBI aims to support economic expansion while maintaining inflation control. The MPC opted for a neutral stance, allowing flexibility to respond to economic shifts.
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Global and Domestic Economic Context
The global economy continues to face challenges, with trade policy uncertainties and a strong U.S. dollar impacting financial markets. Meanwhile, India’s economic resilience is supported by a strong services sector, a recovering agricultural sector, and improving industrial output.
The repo rate cut is expected to lower lending rates, making home loans and other borrowings more affordable. Financial institutions are likely to adjust interest rates, benefiting consumers and businesses. India’s foreign exchange reserves remain strong, ensuring stability against external financial shocks.
The MPC remains watchful of global uncertainties and inflation risks. The minutes of the February meeting will be released on February 21, 2025, while the next policy review is scheduled for April 7-9, 2025.
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