RBI Cuts Repo Rate by 25 Basis Points, Providing Relief to Home Loan Borrowers

The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points during its monetary policy meeting on February 7, 2025. This marks the first rate cut in nearly five years, providing much-needed relief to home loan borrowers who have either faced rate hikes or stagnant interest rates during this period. Following this decision, lenders are expected to lower their floating-rate home loan interest rates.

RBI Delivers on Expectations

The decision aligns with market expectations, as there was broad anticipation of a modest 25 bps cut. Explaining the rationale behind the move, Sahil Agarwal, CEO of Nimbus Group, stated, “There were strong expectations for a modest 25 bps rate cut in today’s monetary policy meeting, and the RBI has delivered on those expectations. The decision was driven by the need to support GDP growth, inflation remaining within a comfortable range for the past few quarters, and prevailing tight liquidity conditions.”

The rate cut also comes under the leadership of newly appointed RBI Governor Sanjay Malhotra, marking his first Monetary Policy Committee (MPC) meeting. “This decision is expected to bring relief to loan borrowers, as banks are likely to lower lending rates for home loans, auto loans, and business credit. Lower borrowing costs will encourage spending and investment, providing a much-needed boost to economic activity,” said Adhil Shetty, CEO of BankBazaar.com.

Retail Inflation Remains a Key Focus for RBI

The RBI has maintained its focus on containing retail inflation, which it aims to keep around 4%. While inflation has declined significantly, further efforts are needed to ensure it remains durably within the central bank’s comfort zone.

According to Bajaj Broking Research, “CPI inflation for FY26 is projected at 4%, with January likely below 4.5%. December inflation eased to 5.22%, marking four consecutive months above 5%. Food inflation dropped to 8.4% from 9% in November.”

Arsh Mogre, Economist at Institutional Research, PL Capital Group – Prabhudas Lilladher, noted, “Inflation is easing (Dec 2024 CPI: 5.2%, expected to fall to 4.5%-4.7% in coming months), but risks persist from imported inflation due to a depreciating INR (₹87/USD).” A sustained decline in retail inflation will be critical for any future repo rate cuts.

Economic Growth Concerns Could Pressure RBI

Slowing economic growth has become a concern, which could increase pressure on the RBI to consider further rate cuts. GDP growth saw a sharp decline in the July-September quarter, raising alarms about the economy’s overall health.

“Growth is clearly slowing (FY25 GDP projected at 6.4% vs. 8.2% in FY24), driven by a weak investment cycle and cautious consumption,” said Mogre. The RBI may have to balance its policy approach to support growth while keeping inflation in check.

Foreign Exchange Challenges and Capital Outflows

A depreciating rupee has also emerged as a key concern. “INR has depreciated to ₹87/USD, down from ₹84.7/USD in Dec 2024, driven by stronger USD, rising US 10Y yields (4.51%), and $7.5bn FPI outflows since Nov 2024. The narrowing India-US rate differential is increasing capital outflow risks, forcing RBI to calibrate its easing cycle cautiously to avoid excessive rupee weakness. Any disorderly INR depreciation would raise imported inflation risks and require forex reserve depletion to stabilize markets,” Mogre explained.

When Can the Next Repo Rate Cut Be Expected?

For any further rate cuts, retail inflation must be brought under sustained control. “Inflation remains above the RBI’s medium-term target of 4%, and increasing global trade-related uncertainties have added complexity to the economic outlook. The government’s fiscal prudence, reflected in the recently announced Union Budget, points toward a downward trajectory for interest rates. While the broader direction seems clear, the precise timing of the next rate cut remains uncertain,” said Dhiraj Relli, MD & CEO of HDFC Securities.

Expected Rate Cuts in 2025

Further reductions in the repo rate could be in store for the year, depending on inflation trends and global economic conditions. “Further cuts of 50-75 bps in CY25 will depend on inflation sustainability and global monetary conditions,” Mogre predicted.

Impact of 25 bps Rate Cut on Home Loan EMIs

For home loan borrowers, the 0.25% reduction in interest rates presents two options: reducing their EMIs or shortening their loan tenure.

For instance, on a ₹30 lakh home loan for 20 years, if the interest rate drops from 9% to 8.75%, the EMI will decrease from ₹26,992 to ₹26,551, a reduction of ₹480 per month or 1.78%.

Adhil Shetty of BankBazaar.com provided further insights: “Assume you took a ₹50 lakh loan one year ago at 9% for 20 years. The total EMI paid over the duration of the loan comes to approximately ₹58 lakh. If the repo rate cut is fully transmitted and your loan is reset to 8.5%, the overall interest burden will reduce to ₹50 lakh, providing a savings of ₹8 lakh. This also shortens the loan tenure by 18 months. If the rate cut is 25 basis points, the tenure reduces by 10 months, and the interest burden drops to ₹53.6 lakh, saving ₹4.4 lakh over the loan’s duration.”

What Should Home Loan Borrowers Do Now?

Borrowers must decide whether to reduce their EMIs or shorten their loan tenure. Experts recommend opting for a tenure cut while keeping EMIs unchanged, as it leads to greater savings on total interest.

Shetty suggests that borrowers with good credit scores explore refinancing options for lower interest rates. “If they keep the EMI constant with a lower rate — let’s say 8.25% — they will secure per-lakh savings of ₹14,480 over the remaining tenure. These savings of nearly 15% per lakh are substantial.”

Assuming the revised rate applies from April 1 after 12 EMIs have been paid, the per-lakh interest savings for the rest of the year will be ₹3,002. For a ₹50 lakh loan, this implies savings of ₹1.50 lakh in the second year alone.

Factoring in additional savings from income tax slab hikes, salaried individuals can see significant financial gains. For instance, someone earning ₹25 lakh annually could benefit from tax savings of ₹1.14 lakh and home loan interest savings of ₹1.50 lakh, totaling ₹2.64 lakh in savings for the year, or approximately ₹22,000 per month.

Also Read: RBI Monetary Policy Meeting: Date, Time, When & Where To Watch