The only negative impact from the repo rate reduction will be on the deposit rates. There will not be any rate change for the existing depositors who have locked the fixed deposits for a specific tenure.
Published Feb 08, 2025 | 8:00 AM ⚊ Updated Feb 08, 2025 | 3:15 PM
The immediate benefit of repo rate reduction will be to borrowers whose housing loans are on variable interest rates. (Representational pic/iStock)
Synopsis: The reduction in repo rate by 25 bps to 6.25% will boost credit growth, lending to housing, affordable housing, personal and vehicle loans, credit card loans and loans to builders/realtors.
The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) has cut the repo rate (the rate at which the banks borrow from RBI) by 25 basic points to 6.25% from 6.5% for the first time in five years.
The decision of the six-member MPC to reduce the repo rate and to maintain the ‘neutral’ stance was unanimous.
The most awaited repo rate cut follows the huge income tax cuts and rebates granted in the Union Budget 2025-26, wherein ‘zero/nil’ tax shall be applicable for income up to ₹12 lakh per annum.
For the salaried class, the limit has been enhanced to ₹12.75 lakh per annum. The largesse from the South Block has been complemented equally by the Mint Street.
Interestingly the RBI/MPC policy announcement has many firsts.
The policy is the first announcement by the new RBI Governor Sanjay Malhotra, first in 2025, first after the Union Budget, first after Trump taking over as the US President and the commencement of tariff wars.
More interestingly is the strange coincidence that three former RBI Governors — Urjit Patel (05/10/2016), Shaktikanta Das (09/02/2019) and Sanjay Malhotra reduced repo rates from 6.50 % to 6.25 % on their debutant policy announcements.
The reduction in repo rate by 25 bps to 6.25% will boost credit growth, lending to housing, affordable housing, personal and vehicle loans, credit card loans and loans to builders/realtors.
The immediate benefit of repo rate reduction will be for borrowers whose housing loans are on variable interest rates (not applicable to fixed interest rates) which are linked to “repo rate” as an “External benchmark lending rate”(EBLR) and to MSME/ priority sector loans.
The reduction can be to the extent of 10 bps/25 bps. The transmission of rate reduction will almost be immediate as 60% of the variable rate loans are linked to external benchmark/repo rate, as of September 2024.
For corporates and business loans, the interest rate charged will normally be based on Marginal Cost Lending Rates (MCLR – since 01/04/2016). MCLR is decided on the cost of deposits/ borrowings by the banks plus loading of tenure premium and risk weightage.
The interest rates on these loans will get reduced during the normal ‘reset’ months of June/December and reduction in rates effective from January/July. There can be annual resets too as banks have to manage their Net Interest Margins/profitability.
Home loan borrowers from Housing Finance Companies (HFCs)/NBFCs who decide lending rates on their own Prime Lending rates (PLR- as approved by their Boards) may not get the ‘rate cut’ advantage immediately, like in banks, since their borrowing costs primarily depend upon the bank term loans availed by them and on their deposit rates — costs of which are normally higher than banks other than refinance availed from the National Housing Bank (NHB).
In the prevailing situation of ‘falling interest rates’ such borrowers from HFCs/NBFCs will have the opportunity to shift their loans to other banks who offer attractive rates based on their repayment track record/present CIBIL scores and the option of availing reset to get reduced interest rates in the same HFCs/NBFCs.
HFCs offer ‘reset rates’ with a ‘rate cap’ benefit in the range of 1% – 3% from their present rates. This saves time and avoids the hassles of ‘rate shopping’, filing new applications, dealing with processing fees, addressing fresh CIBIL issues and adjusting to the new suitor!.
For fresh/new home loan borrowers, car loans, education loans, the interest rate reduction from SBI, public sector banks and from few big private sector banks the interest rate reduction can be immediate in the range of 10 bps – 25 bps.
The best home loan interest rates will be in the range of 7.75% – 9%. However, interest rate can vary depending on credit scores (above 750 score gets better rate), tenure, loan to cost ratio (LCR), instalment to income ratio (IIR) and deviations taken while sanctioning the loans.
Hypothetically, for an existing home loan, a borrower of ₹10 lakh at an interest of 9% with a loan tenure of 20 years (240 months), paying an EMI of ₹8,997 and who has paid 12 months EMI till March 2025 to the tune of ₹1,07,964, with the rate reduction of his loan to 8.75%, the EMI will get reduced to ₹8,837 with a monthly saving of ₹160 / ₹1,920 per year if the borrower reschedules his loan to the new rate.
Normally, the EMI remaining constant at the original contracted rate/EMI , the tenure of the loan will get reduced with the payment of same EMI which translates into saving of 7-9 EMIs, under ceteris paribus condition.
To seize the opportunity of surplus income in the hands of consumers and the advantage of interest rate reduction, the builders. to liquidate the inventory and to boost sales, may tweak their selling rates of apartments. The price reduction/ correction will also be due to builders getting construction finance/term loans from banks at slightly reduced rates on account of repo rate cut.
The only negative impact from the repo rate reduction will be on the deposit rates. There will not be any rate change for the existing depositors who have locked the fixed deposits (FDs) for a specific tenure.
For new depositors there will be reduction in the FD rates as banks transmit the repo rate reduction meticulously and religiously to the FDs to offset the rate reduction on loans.
(S Narendra is a Bengaluru-based Banker, Economist and guest columnist. Views are personal. Edited by Majnu Babu).
