Mumbai, June 6: In a move aimed at boosting credit flow and consumer sentiment, the Reserve Bank of India (RBI) on Friday announced a 50 basis points reduction in the repo rate, bringing it down from 6.00% to 5.50%. This decision is poised to bring tangible relief to borrowers, particularly those with home, auto, and personal loans.
The repo rate—defined as the interest rate at which the RBI lends to commercial banks—serves as a benchmark for lending rates across the financial system. This latest reduction marks the third rate cut since the onset of the COVID-19 pandemic. The central bank had maintained the repo rate at 4% between May 2020 and April 2022, after which it gradually raised it to 6.5% by February 2023. The rate was held steady until this most recent policy easing.
With borrowing costs now lower, both prospective and existing loan customers are expected to benefit. New borrowers can look forward to more attractive interest rates, while existing borrowers—particularly those with floating-rate loans—are likely to see their EMIs decline in the coming months.
“This move by the RBI is a significant relief for homebuyers and personal loan holders,” said Atul Moga, CEO and Co-Founder of BASIC Home Loan. “Public sector banks, which typically lead in transmitting rate cuts, are expected to introduce competitive lending offers, resulting in substantial savings for customers.”
Impact on Home Loan EMIs
Consider a Rs 50 lakh home loan from HDFC Bank with a tenure of 30 years. At the previous interest rate of 8.70%, the monthly EMI stood at Rs 39,136. Following the 50 basis points cut, if the interest rate drops to 8.20%, the revised EMI will be approximately Rs 37,346. This results in a monthly saving of Rs 1,790, translating to an annual saving of Rs 21,480. Over the loan tenure, the cumulative savings could amount to several lakhs.
Impact on Personal Loan EMIs
Similarly, a Rs 5 lakh personal loan at 12% interest over five years would have an EMI of Rs 11,122. With the rate now adjusted to 11.50%, the EMI would fall to Rs 10,963—offering a monthly saving of Rs 159, or Rs 1,908 annually.
While these figures are indicative, actual savings will vary depending on each bank’s lending policy. Loan interest rates are typically composed of two components: the Marginal Cost of Funds based Lending Rate (MCLR) and a bank-specific spread. While the MCLR is expected to reduce following the RBI’s action, the extent of benefit passed on to borrowers depends on the bank’s discretion regarding the spread.
Market Outlook
Industry experts suggest that this “jumbo” cut in the repo rate, along with a concurrent reduction of the Cash Reserve Ratio (CRR) by 100 basis points, is aimed at infusing liquidity and reviving consumer demand. The move is expected to stimulate sectors such as housing and automobiles, which are sensitive to interest rate movements.
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