RBI Repo Rate Cut: Impact on Home and Car Loan EMIs
After five years, the Reserve Bank of India (RBI) has finally reduced the repo rate. Following the Monetary Policy Committee (MPC) meeting on February 7, 2025, the newly appointed RBI Governor, Sanjay Malhotra, announced the latest monetary policy update. As per market expectations, the repo rate has been lowered by 25 basis points to 6.25%. Let’s explore how this decision will impact your home and car loan EMIs.
Repo Rate Cut After Five Years
The MPC has decided to reduce the policy interest rate, or repo rate, for the first time in five years. After its three-day meeting, the committee announced a 25 basis point cut, lowering the rate from 6.5% to 6.25%. The last time a repo rate cut was implemented was in 2020, during the COVID-19 pandemic. However, in subsequent years, the interest rate was gradually increased to 6.5%. Now, with this reduction, borrowers may experience some relief in their loan EMIs.
How Will This Repo Rate Cut Benefit Borrowers?
According to tax expert and senior CA Sanjeev Maheshwari, this reduction in interest rates could ease the financial burden on common people. The cost of borrowing for home loans, car loans, and personal loans is expected to decrease, making EMIs more affordable. However, the extent of relief depends on individual banks, as they adjust their lending rates based on their financial positions. While not all banks pass on the full rate cut to customers, this move is likely to encourage consumption and economic activity.
Maheshwari also highlighted that the government is focusing on increasing disposable income by reducing capital expenditures and implementing tax relief measures. For instance, in the Union Budget 2025-26, the government has raised the income tax exemption limit to ₹12 lakh, aiming to stimulate domestic demand and boost economic growth.
Impact of the Repo Rate Cut on Home and Car Loan EMIs
A repo rate reduction directly impacts loan EMIs, making borrowing more affordable. Here’s an estimate of how the 25 basis point cut will affect borrowers:
- Home Loan Example:
If an individual has taken a ₹50 lakh home loan at an 8.5% interest rate for 20 years, the EMI before the rate cut was ₹43,391. After the 0.25% reduction, the interest rate will drop to 8.25%, reducing the EMI to ₹42,603. This results in a monthly saving of ₹788 and an annual saving of ₹9,456. - Car Loan Example:
For a car loan of ₹5 lakh at a 12% interest rate, the borrower’s previous EMI was ₹11,282. After the repo rate cut, if banks reduce interest rates by 0.25%, the new EMI will be ₹11,149, saving ₹133 per month or ₹1,596 annually.
Why Did the RBI Reduce the Repo Rate?
According to Arsh Mogre, an economist at PL Capital Group, three main factors influenced the RBI’s decision:
- Inflation Control:
The Consumer Price Index (CPI) inflation rate was at 5.2% in December 2024 and is projected to decline further to 4.5%-4.7% in the coming months. However, depreciation in the Indian Rupee against the US Dollar poses a risk of imported inflation. - Economic Growth Slowdown:
The GDP growth rate for FY 2025 is estimated at 6.4%, significantly lower than the 8.2% recorded in FY 2024. To counteract this slowdown, the RBI had to take measures to boost economic activity. - Liquidity Concerns:
Reduced liquidity in the market was another crucial reason for the rate cut. Lowering interest rates encourages borrowing and investment, thereby supporting economic momentum.
With this latest move, the RBI aims to strike a balance between inflation control and economic growth, ensuring stability while providing relief to borrowers. However, its effectiveness will depend on how banks respond in adjusting their lending rates.
