Reserve Bank of India (RBI) Governor Sanjay Malhotra announced a repo rate cut of 25 basis points to 6.25 percent on Friday, paving the way for lower interest rates and reduced equated monthly installments (EMIs).

"...growth-inflation dynamics open up policy space for the MPC to support growth while remaining focussed on aligning inflation with the target. Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25 basis points to 6.25 percent," he said during his address on Friday.

All retail floating-rate loans sanctioned after October 1, 2019 are linked to an external benchmark, which is the repo rate in most cases, so the rate cut will directly benefit home loan borrowers.

Majority of home loans in India carry floating interest rates. As a result, interest burden and their EMIs will go down, providing relief to homeowners.

The rate cut is driven by subsiding inflation concerns and government initiatives aimed at reviving economic growth. Notably, December's inflation rate declined to a four-month low of 5.22 percent, down from 5.48 percent in the previous month, primarily due to a slowdown in food price increases.
Since October 2019, banks have linked floating-rate retail loans, including home loans, to an external benchmark, which is the repo rate for most banks. As a result, any changes to the repo rate directly affect the interest rates on these loans. When the repo rate is cut, borrowers benefit from lower interest rates, but when it is hiked, their interest burden increases.

RBI BREAKS ITS LONGEST PAUSE WITH RATE REDUCTION

The RBI has broken its longest-ever pause with a repo rate cut, the first in almost five years. The last time the RBI cut rates was in May 2020, when it lowered the repo rate to 4 percent to cushion the economy from the Covid-19 pandemic's impact. Since May 2022, the central bank has raised the repo rate seven times to 6.5 percent to combat rising inflation, supply chain disruptions, and global price surges. The rate pause had been in effect since February 2023, making this recent rate cut a significant development.

BENEFITS FOR EXISTING HOME LOAN BORROWERS

Consider a Rs 50 lakh home loan taken a year ago with a 9 percent interest rate and a 20-year tenure (240 months). The monthly EMI would be approximately Rs 44,986, with a total interest payout of around Rs 58 lakh over the loan period. According to Adhil Shetty, CEO of BankBazaar.com, "A repo rate cut would result in a direct reduction in interest rates for home loan borrowers."

Building on this scenario, with a rate cut of 25 basis points, your home loan interest rate will decrease from 9 percent to 8.75 percent. As a result, your total interest payout will drop to approximately Rs 53.6 lakh, translating to savings of Rs 4.4 lakh. Additionally, your loan tenure will be shortened to 230 months, allowing you to repay your loan 10 months earlier.

In another scenario, for a Rs 50-lakh loan with an interest rate of 8.85 percent and a 25-year tenure, this 25 bps cut will shorten the tenure by 27 months, assuming the borrower chooses not to reduce the EMI amount (Rs 41,447). Her interest outgo will come down by Rs 11.15 lakh,” says Vipul Patel, Founder, MortgageWorld.

GAINS FOR PROSPECTIVE HOMEBUYERS

According to Raoul Kapoor, Co-CEO of Andromeda Sales and Distribution Pvt Ltd, the repo rate cut, combined with the tax benefits from the revised tax slabs announced in the Union Budget 2025 for the new tax regime, is likely to boost loan eligibility and repayment capacity in the upcoming fiscal year, motivating more potential homebuyers to invest in property ownership.

Sahil Agarwal, CEO of Nimbus Group, said, "Lower home loan interest rates will be a significant draw for potential homebuyers, potentially leading to an increase in demand for housing and benefiting both individual buyers and investors."