RBI announces surprise double rate cut. Here is what it means for borrowers’ EMIs

Ziraat Times Team Report

Srinagar: The Reserve Bank of India (RBI) today announced a surprise 50 basis points (bps) cut in the repo rate, bringing it down from 6% to 5.5%.

This marks the third rate cut in 2025, following two 25 bps cuts in February and April, resulting in a cumulative reduction of 100 bps since February. This significant monetary policy easing, accompanied by a shift in stance from “accommodative” to “neutral,” is aimed at stimulating economic growth amid cooling inflation and global economic challenges, such as U.S. tariffs impacting Indian exports. Below, I outline the impact of this rate cut on the Equated Monthly Installments (EMIs) for various categories of borrowers, based on available information.

What is the Repo Rate and How Does it Affect EMIs?

The repo rate is the interest rate at which the RBI lends to commercial banks. A lower repo rate reduces banks’ borrowing costs, which often leads to lower lending rates for consumers, particularly for loans linked to the repo rate (External Benchmark Lending Rate, or EBLR).

This translates to reduced EMIs or shorter loan tenures for borrowers with floating-rate loans. However, the extent and speed of the benefit depend on whether loans are repo-linked, MCLR-linked (Marginal Cost of Funds-based Lending Rate), or fixed-rate, and on banks’ willingness to pass on the rate cut.

Impact on Various Categories of Borrowers

1. Home Loan Borrowers

   • Impact: Home loan borrowers with floating-rate loans, especially those linked to the repo rate (EBLR), are the primary beneficiaries. The 50 bps cut is expected to lower home loan interest rates closer to or below the psychologically significant 8% mark, with some prime borrowers (credit score >750) potentially accessing rates as low as 7.85%.

   • EMI Savings Example:

     • For a ₹50 lakh home loan with a 20-year tenure at an interest rate of 8.5% (pre-cut), the EMI is approximately ₹44,186. After a 50 bps reduction to 8%, the EMI drops to around ₹41,826, saving about ₹2,360 per month or ₹28,320 annually. Over the loan tenure, this could result in total interest savings of approximately ₹5.64 lakh.

     • For a ₹10 lakh loan at 8.5% over 20 years, the EMI reduces from ₹8,678 to ₹8,364, saving ₹314 monthly or ₹75,320 over the tenure.

   • Considerations:

     • Borrowers with older loans linked to MCLR or Base Rate may not see immediate benefits, as these rates adjust more slowly. Refinancing to a repo-linked loan could maximize savings.

     • Fixed-rate home loan borrowers will see no change in EMIs.

     • Banks may not pass on the full 50 bps immediately due to factors like funding costs or net interest margin pressures.

     • Borrowers can use EMI savings to prepay loans or shorten tenures, which could save more interest in the long run.

2. Personal Loan Borrowers

   • Impact: Personal loans, often floating-rate and linked to EBLR, will also benefit from lower interest rates. The rate cut could reduce borrowing costs, making personal loans more affordable for expenses like weddings, travel, or emergencies.

   • EMI Savings Example:

     • For a ₹10 lakh personal loan at 14% interest over 5 years, a 50 bps reduction to 13.5% could lower the EMI by approximately ₹500–₹600 per month, saving thousands over the loan tenure.

   • Considerations:

     • Personal loans typically have shorter tenures, so the absolute savings may be less significant than for home loans, but monthly cash flow improves.

     • Borrowers should check if their loan is repo-linked and monitor reset periods (usually quarterly) to confirm when the rate cut takes effect.

3. Auto Loan Borrowers

   • Impact: Auto loans (car and two-wheeler loans) linked to the repo rate will see reduced EMIs, encouraging purchases in the mid- to high-end vehicle segments. This is particularly beneficial as the auto sector recovers from supply chain issues.

   • EMI Savings Example:

     • For a ₹10 lakh car loan with a 5-year tenure at 9.2% interest, a 50 bps reduction to 8.7% could reduce the EMI by around ₹100–₹200 per month, depending on the lender’s pass-through. For a ₹5 lakh loan, savings might be around ₹50–₹100 monthly.

   • Considerations:

     • The auto sector may see a demand boost due to cheaper financing, but the extent of EMI reduction depends on banks’ reset cycles and whether the full 50 bps is passed on.

     • Fixed-rate auto loans remain unaffected.

4. Education Loan Borrowers

   • Impact: Students with floating-rate education loans linked to the repo rate will benefit from lower interest rates, reducing the financial burden of higher education.

   • EMI Savings: Specific examples are less documented, but a 50 bps rate cut could lower EMIs by a small but meaningful amount, similar to personal loans, depending on loan size and tenure.

   • Considerations:

     • Education loans often have longer repayment periods post-moratorium, so interest savings could be significant over time.

     • Borrowers should confirm with lenders whether the loan is repo-linked and when rate adjustments will reflect.

5. Business and MSME Loan Borrowers

   • Impact: Entrepreneurs and small businesses with repo-linked loans will benefit from cheaper credit, facilitating investment and expansion. This aligns with the RBI’s goal to stimulate private consumption and investment.

   • EMI Savings: Savings depend on loan size and tenure, but a 50 bps reduction could lower monthly payments significantly for large business loans, improving cash flow for operations or growth.

   • Considerations:

     • MSME loans often have higher interest rates, so the relative impact of a 50 bps cut may be less pronounced but still beneficial.

     • Banks’ lending norms may tighten due to global economic uncertainties, so borrowers should lock in rates early.

Additional Considerations for Borrowers

• Transmission Delays: While repo-linked loans see faster pass-through, banks may take weeks to months to adjust rates, depending on their reset cycles (typically quarterly). Some banks, like HDFC and Axis, have previously passed on full benefits, but others may be cautious due to funding costs or non-performing assets (NPAs).

• Refinancing Opportunities: Borrowers with MCLR-linked or older loans should consider switching to repo-linked loans or transferring to lenders offering lower rates (e.g., 7.85–8.35% for prime borrowers). Balance transfer fees should be weighed against savings.

• Strategic Use of Savings: Borrowers can use EMI savings to prepay loans, shorten tenures, or invest in financial instruments like mutual funds, potentially amplifying long-term benefits.

• Market Context: The rate cut comes amid cooling inflation (3.2% in April 2025) and a projected GDP growth of 6.5% for FY26, but global risks like U.S. tariffs could limit further cuts. The RBI’s neutral stance suggests limited room for additional easing.

• Fixed Deposit Impact: While borrowers benefit, fixed deposit (FD) rates may decline, affecting savers. Borrowers with surplus funds should consider locking in current FD rates before further reductions.