Home, Auto Loans to Get Cheaper at RBI Cuts Repo Rate

Mumbai: The Equated Monthly Instalments (EMI) on home, car, education and business loans are set to reduce further as the Reserve Bank of India’s Monetary Policy Committee on Friday reduced the repo rate for the fourth time by 25 basis points to 5.25 per cent, in addition to announcing liquidity infusing plans to facilitate faster transmission of rate cuts to borrowers. The central bank announced open market purchase of government bonds worth Rs one lakh crore and $ 5 billion of dollar-rupee buy/sell swap that would speed up the transmission of lower rates. At the current average exchange rate this implies an injection of around Rs 45000 crore.

Says Vipul Patel chief executive and founder of MortgageWorld, “A home loan borrower who has taken a Rs 50 lakh loan linked to Repo rate in January 2025 at 8.50 per cent for a 25 year tenure will pay an interest of 7.25 per cent post Friday’s repo rate cut. In case he chooses to lower the EMI while keeping the loan tenure constant, his EMI which was Rs 40261 in January stands reduced to Rs 36140 now which amounts to a total interest saving of Rs 12.36 lakh over the loan period. Incase, he chooses to keep the EMI unchanged and reduce the tenure of the loan, he will reduce the total number of EMIs from 300 (January) to 237 EMIs resulting in an interest saving of Rs 26.62 lakh. Thus, opting for a lower tenure by keeping the EMI unchanged will result in higher interest saving and clear your loan outstanding faster.”

With Friday’s repo rate cut, the total reduction in repo rate is 125 basis points since February this year. One basis point is one hundredth of a percentage point. Repo rate is the rate at which the central bank lends short term money to commercial banks. A lower repo rate means banks can borrow funds at a lower cost from the central bank and are expected to pass on the lower cost to the borrowers.

While the new borrowers with loans linked to repo rate will be offered loans at lower rate, the exact date of rate cut transmission to the old borrowers whose loans are linked to the repo rate would depend on the rate reset dates set by their respective lenders. Till then, they will continue to service their loan as per their existing rates. However, borrowers mostly companies and SMEs whose loans are linked to Marginal Cost of Funds based lending rate (MCLR) will have to wait for a few months to see a reduction in their debt burden. Also, all other loans with fixed rates of interest will not fall. These include personal loans which are of short duration and the interest rate is fixed.

It is pertinent to note that public sector banks pass on the repo reduction on an immediate basis. However, a few lenders follow the policy of monthly reset so the impact of the reduction will be felt on 5th to 15th of the following month. Most private and foreign banks have the reset policy of quarterly and the impact will be felt only in the next quarter.

In response to the cumulative 100 basis points cut in the policy repo rate from February to October, the weighted average lending rate (WALR) of commercial banks has declined by 69 bps for fresh rupee loans and 63 bps on outstanding rupee loans. Transmission has been broad-based across sectors. On the deposit side, the weighted average domestic

term deposit rate (WADTDR) on fresh deposits has declined by 105 bps, while that on outstanding deposits has softened by 32 bps over the same period.