The Reserve Bank of India (RBI) has provided relief to both existing and potential borrowers by reducing the repo rate by 25 basis points, bringing it down from 6.25% to 6%. This marks the second rate cut in 2025, following a similar 0.25% reduction in February. The move is expected to lower monthly loan repayments (EMIs) on home and auto loans.
Impact on Borrowers
When the RBI reduces the repo rate, home loan borrowers with repo-linked interest rates benefit as banks generally pass on the reduction. Most banks charge an additional interest rate of 2.65% to 2.75% over the repo rate. With the latest cut, the external benchmark lending rate (EBR) of the State Bank of India (SBI) could drop to 8.65%.
For those who have taken home loans at high interest rates, the reduction is a welcome change. Many borrowers have been paying EMIs for longer than initially planned due to high interest costs. A total reduction of 0.50% in just two months will ease their burden significantly.
Not All Banks May Reduce Rates Immediately
Despite the RBI’s move, not all banks may immediately lower their home loan interest rates. Factors such as rising fund-raising costs and pressure on net interest margins might delay the transmission of benefits to borrowers. Some banks have still not passed on the benefits of the February rate cut.
Borrowers should check with their respective banks to confirm whether the lower rates are applicable to their loans.
Credit Score Matters
A borrower’s credit score plays a crucial role in determining the interest rate. Banks offer the lowest rates to those with a credit score above 750. If a borrower’s credit score is low, they may not fully benefit from the rate cuts. For instance, even if a bank reduces its home loan rate to 7.85%, it may not apply to all borrowers.
How the Rate Cut Affects EMIs
With a total reduction of 0.50% this year, home loan calculations will change. Consider a borrower who has taken a ₹40 lakh home loan at an 8.75% interest rate for 20 years. Their EMI would be ₹35,348. If the interest rate drops to 8.25%, the EMI would reduce to ₹34,083, saving ₹3,09,793 in total interest payments over the loan tenure.
Usually, banks do not reduce EMI amounts but instead shorten the loan tenure. If a borrower continues paying the original EMI of ₹35,348 at the new 8.25% rate, the loan will be fully repaid in 220 months instead of 240 months. Borrowers should consult their banks for detailed calculations and benefits.
Impact on Fixed Deposits (FDs)
Interest rates on fixed deposits (FDs) are also likely to be affected by the rate cut. Over the past year, banks have been adjusting FD rates downward. As loan interest rates decrease, deposit interest rates may also see a downward revision. Investors looking to open new FDs should compare rates across banks to find the best option.
Home Loan Interest Rates May Drop Below 8%
Following the RBI’s latest move, home loan interest rates could drop to as low as 8%. Currently, SBI offers home loans in the range of 8.25% to 9.20%. With the recent repo rate cut, the range may shift to 8.00% – 8.95%.
Conclusion
The RBI’s decision to cut the repo rate is a significant relief for borrowers, particularly home loan and auto loan customers. However, the extent of benefits will depend on how banks implement these reductions. Borrowers should stay informed and regularly check with their banks to ensure they receive the lower rates.