Understanding the Repo Rate Cut
The Reserve Bank of India (RBI) last week announced its decision to chop 25 basis points off its repo rate-a reduction from 6.5% to 6.25%. This comes as the bank’s first decision to cut for five years that would help alleviate borrowing costs while boosting economic growth. The key policy rates-the Standing Deposit Facility (SDF) Rate-being revised by Monetary Policy Committee governor Sanjay Malhotra-as follows:
Reduced SDF Rate to 6.0%
Marginal Standing Facility (MSF) & Bank Rate: Reduced to 6.5%
Impact on Home Loans
How Does the Repo Rate Impact Home Loans?
The repo rate directly impacts the lending rates of banks. A cut usually leads to a decrease in home loan interest rates, thereby reducing the burden on new buyers and easing the financial burden on existing borrowers. Here’s how it works:
Floating Rate Home Loans: Borrowers with floating rates will most probably see a drop in their EMIs as the banks lower their rates.
Fixed-Rate Home Loans: The borrowers on fixed rates will not benefit unless they opt for refinance.
Actual Savings for Home Loan Borrowers
Repo rate cut can actually lead to major savings, claims Adhil Shetty, CEO of BankBazaar.
If a borrower has a ₹50 lakh home loan at 8.75% over 20 years, a 25 basis point cut reduces the total interest paid by ₹4.20 lakh, cutting the tenure by 10 EMIs.
If a borrower refinances to a rate 50 basis points lower (from 8.75% to 8.25%), the savings increase to ₹14,480 per lakh over the remaining tenure—about 15% per lakh in total savings.
Agitation: Challenges in Passing the Benefits
Although the repo rate cut is positive news, its direct impact will not be instantaneous for borrowers. Challenges include:
Bank Response Time: Banks can delay the rate reduction of lending that may have limited short-term relief.
Rise in property prices, as a result, particularly in NCR, MMR, and Pune, can reduce some gains.
Borrowers with existing fixed loans should refinance the loan to be eligible for new rates.
What to Do What Borrowers Must Do
Maximizing the Gains Step by Step
Monitor Bank Announcements: Keep track of how soon your bank is passing on the rate cut.
Refinance: If your loan is at a much higher rate, refinancing can be a long-term advantage.
Prepayment Strategy: Use tax benefits and extra savings to make prepayments, thereby reducing the overall interest cost.
Tax Benefits: The latest Budget 2025 changes now make income up to ₹12 lakh tax-free, and the standard deduction of ₹75,000 further enhances affordability.
The Bigger Picture: Impact on Real Estate and Economy
Boost for Homebuyers
Experts believe this move will enhance affordability and drive home sales:
Yashank Wason, MD, Royal Green Realty: “The unchanged repo rate since 2023 has now been reduced, directly benefiting homebuyers by lowering EMIs.”
Rajat Khandelwal, CEO, Tribeca Developers: “Reduced borrowing costs enhance predictability and boost buyer confidence, strengthening real estate growth.”
Anuj Puri, Chairman, ANAROCK Group: “This move, combined with tax benefits, will certainly bode well for first-time homebuyers. However, rising prices may offset some gains.”
Commercial Real Estate and REITs
An easier loan market for office spaces may help improve the commercial real estate segment.
In such a scenario, REITs will emerge as an attractive investment vehicle for investors looking for stable returns at low interest rates.
The Catch: When Will Borrowers See the Impact?
Floating rate borrowers will benefit as the banks accordingly adjust their rates.
Fixed rate borrowers need to re-finance in order to see savings.
The rate adjustments made by banks in lending will determine how soon the borrowers reap a decline in their EMIs.
The cut in repo rate is the right move but not the complete resultant which would cascade through months and is constantly dependent on growth in inflation, bank policies, and property market trends. Borrowers must update themselves and pre-act to attract maximum savings.
