The Reserve Bank of India (RBI), in its latest monetary policy review, has reduced the repo rate—a move that directly impacts the borrowing costs in the economy. For millions of Indian home loan borrowers, this comes as a welcome relief. A lower repo rate means cheaper loans, translating into reduced Equated Monthly Instalments (EMIs) or shorter loan tenures, depending on how you choose to manage your repayment.
But what exactly does this mean for your finances, and how can you make the most of this opportunity? Let’s explore.
Understanding the Repo Rate and Its Impact
The repo rate is the rate at which the RBI lends money to commercial banks. When the repo rate is lowered, it effectively reduces the cost of borrowing for banks, which often pass on this benefit to consumers by lowering interest rates on loans—especially floating-rate home loans.
Most banks now link their floating-rate home loans to external benchmarks like the RBI’s repo rate (post-October 2019). This means any change in the repo rate is quickly reflected in the interest rates borrowers pay. A rate cut, therefore, brings immediate benefits, unlike the earlier marginal cost-based lending rate (MCLR) system which had a lag.
How Much Will Your EMI Reduce?
Let’s break it down with an example.
Suppose you have a ₹40 lakh home loan with a 20-year tenure at an interest rate of 9%. Your EMI would be approximately ₹35,986. If the interest rate drops to 8.5% due to the repo rate cut, your EMI would fall to around ₹34,678—a saving of ₹1,308 per month or nearly ₹15,696 a year.
Over the entire tenure, the cumulative savings could run into lakhs. Alternatively, you could choose to keep your EMI the same and reduce the tenure, helping you become debt-free sooner and save significantly on total interest outgo.
Why This Matters Now
India’s home loan market has expanded rapidly in recent years, driven by competitive rates, increasing urbanisation, and government support like the Pradhan Mantri Awas Yojana (PMAY). However, borrowers have also felt the pinch of recent rate hikes.
Between 2022 and mid-2024, the RBI raised the repo rate multiple times to control inflation. This pushed home loan interest rates to 9% or higher in many cases, significantly increasing EMIs. A ₹50 lakh loan at 7% might have cost ₹38,765 per month in EMIs, but at 9%, that jumps to ₹44,986—a ₹6,221 increase.
Now, with inflation under better control and global central banks signalling rate stability or cuts, the RBI has moved to ease borrowing costs. This signals a turning point and an opportunity for borrowers to realign their finances.
How You Can Benefit
Here’s how existing and new borrowers can optimise the repo rate cut:
1. Ask Your Bank for a Rate Recalibration
If your loan is linked to an older benchmark like MCLR or base rate, you may not automatically benefit from repo rate cuts. Consider switching to a repo rate-linked loan by asking your bank or refinancing with another lender offering better terms.
2. Choose Between Lower EMI and Shorter Tenure
While lower EMIs ease monthly cash flow, reducing tenure saves more in interest over time. If you can manage current EMI levels, opt to reduce the tenure instead of lowering the EMI.
3. Balance Transfer for Better Deals
A balance transfer to another lender offering a significantly lower rate might be beneficial. But do factor in processing fees and potential foreclosure charges. Use a home loan balance transfer calculator to assess actual savings.
4. Re-evaluate Your Financial Goals
The reduction in EMIs or faster loan repayment allows more room in your monthly budget. You can redirect these savings toward investments, emergency funds, or other financial goals.
New Home Buyers: Time to Act?
For potential homebuyers, this is an opportune moment. Lower interest rates mean improved affordability. For example, a family with a ₹75,000 monthly income can afford a larger loan size when interest rates drop, expanding property choices.
Moreover, with developers offering festive discounts, ready-to-move-in inventory, and schemes like “no EMI till possession,” home buying becomes more attractive. Coupled with tax benefits under Sections 80C and 24(b), owning a home becomes not just a dream, but a smart financial move.
Caution: Rates May Not Stay Low Forever
While the current environment is favourable, remember that repo rates are cyclical. If inflation pressures resurface or global uncertainties increase, the RBI may again resort to tightening. Floating-rate loans will rise accordingly.
Hence, don’t overleverage assuming rates will stay low permanently. Build a buffer into your budget so your finances aren’t stretched in case EMIs rise again in future.
Conclusion
The RBI’s move to cut the repo rate brings a timely breather for home loan borrowers. Lower EMIs or faster debt repayment are both welcome outcomes. Whether you are servicing an existing loan or planning to buy your dream home, this is the time to reassess your loan terms and act strategically.
In a financial environment that’s finally shifting in favour of the borrower, the key is to stay informed, take proactive steps, and use every rupee saved to build long-term financial strength.
