RBI Repo Rate Cut: Will your loan EMIs decrease?

The decision of the Reserve Bank of India (RBI) to cut the repo rate by 25 basis points could be a much-needed relief for the consumers who have been grappling with the pressure of inflation and rising cost of living. The repo rate revision will pave the way for lower interest rates and equated monthly instalments (EMIs) across retail loan categories.

The Monetary Policy Committee (MPC) of the apex bank, on Friday, announced a reduction in repo rate to 6.25% from the existing 6.5%.

What is the RBI repo rate cut all about?

The repo rate is the interest rate at which the RBI provides loans to commercial banks. This is the first repo rate cut since May 2020. The six-member MPC, in its unanimous decision, explained that the repo rate has been reduced to make borrowing cheaper while encouraging spending and investments.

The repo rate is expected to provide major relief to borrowers as loan EMIs are also likely to come down in alignment with the RBI's lending rates. The banks revise the interest rates based on the repo rate fixed by the RBI periodically.

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How can RBI's repo rate reduce loan EMIs?

As the repo rate has come down the banks will receive the money from the RBI at a cheaper rate and this benefit is expected to be passed on to the customers.

Interest rates are offered on most bank loans, including personal, home, car, MSME loans, and other retail floating rate loan borrowings, which are linked to an external benchmark linked rate, or EBRL. RBI's repo rate is also an EBRL, meaning the cut will directly lower interest rates on most bank loans. Therefore, borrowers are likely to get a benefit from the latest reduction. As a result of this, banks might pass on the benefit to the borrowers either in full or in part depending on their own policies.

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Example of how the repo rate change will impact loan EMIs

For example, if you have a home loan of Rs 50 lakh with an interest rate of 8.75% for a tenure of 20 years the EMI stands at Rs 44,186 per month. After the 25 bps repo rate cut, assuming the banks would pass the full benefit to the customers, the same EMI amount will be reduced to Rs 43,391 per month. This will help you save Rs 9,540 per annum.

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