RBI Cuts Repo Rate by 25 Basis Points, Bringing Relief to Home Loan Borrowers
In a significant relief for home loan borrowers, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points during its monetary policy meeting on February 7, 2025. This marks the first such cut in five years, during which borrowers faced either rising or stagnant interest rates. Following this decision, lenders are expected to lower interest rates on floating-rate home loans.
Sahil Agarwal, CEO of Nimbus Group, noted, “There were strong expectations for a modest 25 bps rate cut, and the RBI delivered. The move supports GDP growth, with inflation staying within a comfortable range and tight liquidity conditions persisting.”
Adhil Shetty, CEO of BankBazaar.com, added, “This marks the first MPC meeting led by the new RBI Governor, Sanjay Malhotra. The decision will likely result in lower lending rates for home loans, auto loans, and business credit, encouraging spending and investment.”
Inflation and Growth Concerns
Retail inflation, a key focus for the RBI, remains high. Although it has eased, bringing it consistently within the central bank’s target of 4% may take time.
“CPI inflation for FY26 is projected at 4%, with January likely below 4.5%. Food inflation dropped to 8.4% in December,” said Bajaj Broking Research.
Arsh Mogre, Economist at PL Capital Group, highlighted potential risks: “Imported inflation may persist due to a depreciating INR, which has weakened to ₹87/USD.”
On the growth front, a slowdown is evident. “FY25 GDP is projected at 6.4% compared to 8.2% in FY24,” Mogre added. This decline, driven by weak investment and cautious consumption, may pressure the RBI to consider further rate cuts.
Foreign Exchange Pressures
The depreciating rupee has also become a concern. “The narrowing India-US rate differential is increasing capital outflow risks,” said Mogre. Umeshkumar Mehta of SAMCO Mutual Fund noted that the cut balances currency stability with economic stimulation.
Future Repo Rate Cuts
A further reduction in rates will depend on inflation trends. “While the trajectory is downward, the timing remains uncertain,” said Dhiraj Relli, MD & CEO of HDFC Securities.
Impact on Home Loan Borrowers
A 0.25% rate cut reduces EMIs on a ₹30 lakh home loan for 20 years from ₹26,992 to ₹26,551, saving borrowers ₹480 per month.
Shetty explained, “If a borrower took a ₹50 lakh loan at 9% for 20 years, a 25 bps cut would reduce interest payments by ₹4.4 lakh and shorten the loan tenure by 10 months.”
What Borrowers Should Do
Experts suggest opting for a tenure reduction instead of EMI cuts to maximize interest savings. Shetty advised refinancing at lower rates for borrowers with good credit scores.
For instance, keeping the EMI constant at 8.25% on a ₹50 lakh loan can save ₹1.5 lakh in the second year alone. Combined with recent income tax benefits, borrowers can achieve significant savings.