The Reserve Bank of India (RBI) on Friday cut the repo rate — the rate at which the RBI provides loans to other banks — by 25 basis points to 6.25 percent. This is the first time in five years that the RBI has cut its rate, the last time having been in May 2020.
The repo rate, till now, stood at 6.5%. The move comes barely a week after the Centre cut personal income tax to boost consumption.
But what does this mean for businesses, homebuyers and the country’s financial outlook? Let’s break it down.
What is Repo Rate & Why does it matter?
The repo rate refers to the interest rate at which the RBI provides loans to commercial banks. When this rate decreases, it reduces banks’ borrowing expenses, enabling them to offer loans to businesses and individuals at lower rates.
- Higher Repo Rate → Expensive Loans → Slower Economic Growth
- Lower Repo Rate → Cheaper Loans → Boost in Spending & Investments
The RBI had kept the interest rates stable for the last five years or raised them to combat inflation. This reduction in repo rate now implies a shift in policy, more in the line of invigorating the economy as inflation eased and there is a need to boost economic growth.
What about GDP Forecast?
The governor Sanjay Malhotra declared that the central bank predicts GDP growth for the upcoming fiscal year to be approximately 6.7 percent. Governor Sanjay Malhotra announced that the central bank projects GDP growth for the upcoming fiscal year to be approximately 6.7 percent.
The government, as stated in the Economic Survey published prior to the Budget, anticipated a growth rate of 6.3-6.8 percent for 2025-26 due to a “robust external account, measured fiscal consolidation, and steady private consumption.”
This occurred against the backdrop of a slowing economy, projected to expand at 6.4 percent in 2024-25, the most sluggish pace in four years.
What it means for Home Loans, Business Loans & Borrowers
More Affordable Home Loans & EMIs
- Home loan interest rates will directly decrease for borrowers, leading to more affordable housing.
- A ₹50 lakh loan at an interest rate of 8.5% over 20 years would result in an EMI decrease of ₹1,500-2,500 if rates decrease by 0.5%.
- Borrowers with floating rates gain advantages right away, whereas those with fixed-rate loans might require refinancing.
Support for MSMEs & Business Financing
- Loans for working capital, business growth, and MSME financing will become less expensive, enhancing cash flow.
- Reduced cost of capital = greater recruitment, manufacturing, and growth.
Auto and Consumer Loans to Become Appealing
- Reduced interest rates on auto loans, personal loans, and credit cards will promote consumer spending.
- This benefits the real estate, automotive, and retail sectors, stimulating an increase in consumption.
What has been said about inflation?
The Reserve Bank has estimated retail inflation at 4.2 percent for the next financial year beginning in April, while keeping the 2024-25 forecast at 4.8 percent.
“Assuming a normal monsoon next year, CPI inflation for 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4 percent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent,” the Governor said, while adding that risks were evenly balanced.
What happens when the repo rate is reduced?
When the RBI lowers the repo rate, all external benchmark lending rates (EBLR) associated with the repo rate will decrease, providing relief to borrowers as their equated monthly instalments (EMIs) will drop.
Lenders might also lower interest rates on loans tied to the marginal cost of fund-based lending rate (MCLR), as the complete transmission of a 250 bps increase in the repo rate from May 2022 to February 2023 has not occurred.
What else has the RBI Governor said?
Sanjay Malhotra also assured all stakeholders that the central bank will maintain the consultative approach it has adopted over the years in developing regulations. He mentioned that the input from stakeholders is important and will be taken into account thoughtfully prior to any significant decision.
The Governor further said that while the Indian economy continues to remain strong and resilient, it has not been immune to global headwinds with the rupee coming under depreciation pressure in the recent past. “RBI has been applying all tools at its disposal to face the multi-pronged challenges,” he added.
