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In a major relief for borrowers, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced a 25 basis point (bps) cut in the repo rate, reducing it from 6.5% to 6.25%. This is the first interest rate cut since May 2020, signaling a shift toward a more growth-oriented approach as inflation shows signs of easing.
RBI Governor Sanjay Malhotra confirmed that the policy stance remains neutral, indicating the central bank’s cautious optimism about the economic outlook. The cut in the repo rate is expected to encourage banks to lower lending rates, translating into lower EMIs (Equated Monthly Installments) for borrowers.
Why This Rate Cut Matters
The repo rate is the rate at which the RBI lends money to commercial banks. When the repo rate is reduced, banks typically lower their interest rates on loans. This makes borrowing more affordable for individuals and businesses, boosting spending and investment.
How Much Can You Save?
To understand how this cut can benefit borrowers, let’s take a practical example.
Imagine you have a home loan of ₹50 lakh at an interest rate of 8.5% for 20 years. Here’s a comparison of your monthly EMI before and after the rate cut:
- Old EMI (8.5%): ₹43,059
- New EMI (8.25%): ₹42,452
Monthly Savings: ₹607
Annual Savings: ₹7,284
While ₹607 a month may not seem like a lot, the cumulative savings over the 20-year loan tenure would amount to ₹1,45,680. That’s a significant amount that can be redirected toward investments, children’s education, or other financial goals.
Impact on Different Loan Amounts
- For a ₹30 lakh home loan at 8.5% for 15 years:
Old EMI: ₹29,542 → New EMI: ₹29,108 → Monthly Savings: ₹434 - For a ₹10 lakh personal loan at 12% for 5 years:
Old EMI: ₹22,244 → New EMI: ₹21,978 → Monthly Savings: ₹266
Apart from home loans, borrowers with auto loans, personal loans, and education loans linked to floating interest rates can also expect some relief. Lower EMIs help ease the financial burden, encouraging more spending and supporting the economy.
What Should Borrowers Do Now?
- Check Your Loan Type: If you have a floating rate loan, your EMI will automatically reduce once your bank adjusts its interest rate. For fixed-rate loans, you won’t see an immediate impact.
- Consider Refinancing: If your loan is at a significantly higher rate, refinancing could help you save even more.
- Plan for Future Rate Cuts: With inflation expected to ease further, there’s potential for additional rate cuts. This could lower your borrowing costs even more.
The repo rate cut is a welcome move for borrowers, offering immediate savings and long-term financial benefits. While the reduction may seem modest, the cumulative impact can be substantial, especially for home loan borrowers.
