In a significant move that brings relief to millions of borrowers, the Reserve Bank of India (RBI) announced a cut in the repo rate on the morning of April 9. This marks the second rate cut by the RBI in the current calendar year, with the central bank reducing the repo rate by 25 basis points, bringing it down from 6.25% to 6%. This decision is expected to have a wide-ranging impact on personal loans, home loans, car loans, and the broader Indian economy.

But what exactly is the repo rate, and how does it affect your finances?

The repo rate is the interest rate at which the RBI lends money to commercial banks for the short term. For example, when a bank faces a cash crunch, it can borrow funds from the RBI at this rate. A reduction in the repo rate means it becomes cheaper for banks to borrow from the RBI. As a result, banks often pass on this benefit to consumers by lowering their own lending rates, which translates to reduced EMIs on loans.

A basis point is one-hundredth of a percentage point. So, a 25 basis point cut means the interest rate has been reduced by 0.25%. This latest cut follows a similar 25 basis point reduction in February, making it a total of 50 basis points cut by the RBI this year.

So, why has the RBI opted for two consecutive rate cuts within three months?

The RBI’s primary responsibilities include maintaining price stability (controlling inflation) and supporting economic growth. On the inflation front, the situation appears well under control. Retail inflation in February dropped to 3.6%, the lowest in seven months and comfortably within the RBI’s target band of 4%.

However, growth remains a concern. The pace of India’s economic growth has slowed, and additional pressure has mounted due to global developments. For instance, the recent decision by the U.S. President to impose a 27% reciprocal tariff on Indian goods could potentially drag India’s GDP growth down by 20 to 40 basis points. In FY 2024-25, India recorded a GDP growth of 5.6% in Q2 and 6.2% in Q3. RBI Governor Sanjay Malhotra expects the GDP growth rate to hover around 6.5% in the first two quarters of the current fiscal, with a slight variation in the latter half.

To address this slowdown, the RBI’s Monetary Policy Committee (MPC) has shifted its policy stance from "neutral" to "accommodative." While a neutral stance implies a balanced approach between controlling inflation and supporting growth, an accommodative stance indicates a priority toward stimulating economic activity.

So, what does this mean for you as a borrower?

Lower repo rates can lead to a drop in interest rates on various loans. For example, if you have a home loan, this cut could reduce your EMI and bring substantial savings over the loan tenure. Here are some real-life scenarios to illustrate this:

For a Rs. 30 lakh home loan over 20 years at 9% interest, a 0.5% rate cut brings the rate down to 8.5%, reducing your monthly EMI from Rs. 26,247 to Rs. 25,071 — a saving of Rs. 1,176 per month and around Rs. 2.82 lakh over the loan period.

For a Rs. 50 lakh home loan, the EMI drops by nearly Rs. 2,000 a month, saving Rs. 4.7 lakh in total.

A Rs. 70 lakh loan sees a monthly reduction of Rs. 2,744, amounting to a total saving of Rs. 6.58 lakh over 20 years.

A Rs. 1 crore home loan will see an EMI reduction of Rs. 3,920 per month, resulting in an approximate saving of Rs. 9.4 lakh over the loan period.

In addition to the rate cut, this year’s Union Budget also introduced income tax relief, making annual income up to Rs. 1 lakh tax-free — a move expected to boost disposable income and encourage consumer spending.

All these measures are aimed at injecting momentum into the Indian economy. Cheaper loans can drive higher consumer spending on homes, cars, and businesses, thereby stimulating economic activity.

As always, it will be interesting to see how quickly and to what extent banks pass on the benefits of the repo rate cut to their customers. If you’re planning to take a new loan or already have one, this could be a good time to review your financial plans.

Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute financial advice. Readers are advised to consult with a qualified financial advisor or their respective banks for personalized guidance based on their specific financial situation. The calculations and examples given are approximate and may vary depending on bank policies and market conditions. The author and the website are not responsible for any financial decisions made based on this content.