RBI Cuts Repo Rate By 25 bps; FY25 Inflation At 4.8%
On 7th February, the Reserve Bank of India (RBI) made an important announcement at the RBI Monetary Policy Meeting, reducing the repo rate by 25 basis points, bringing it down to 6.25%. This move was made by the RBI’s Monetary Policy Committee, and Governor Sanjay Malhotra clarified that the overall policy stance continues to be “neutral.”
This decision marks the first interest rate cut by the RBI since the COVID-19 pandemic era in May 2020. During the period from May 2020 to April 2022, the RBI kept the repo rate unchanged at a historically low level of 4% to support the economy during the challenging times caused by the pandemic. However, as the economic recovery began, the RBI started gradually increasing the interest rates in April 2022. By February 2023, the rate had risen to 6.5%. Since then, the rate remained steady until this recent reduction.
The cut in the repo rate is significant as it signals a shift in the RBI’s approach. With the reduction, borrowing costs are expected to decrease, making loans more affordable for consumers and businesses alike. The decision reflects the RBI’s ongoing efforts to balance inflation control with economic growth and support the broader recovery in the economy.
RBI Repo Rate Cut in Five Years Brings Relief to Borrowers, Making Loans Cheaper for the Middle Class
This marks the first rate cut in nearly five years, a period when home loan rates either stayed the same or were increased. The RBI’s Monetary Policy Meeting decision to cut the repo rate offers much-needed relief for borrowers who have been facing higher home loan EMIs due to rising interest rates in recent years.
The reduction in the repo rate is expected to have an immediate impact on floating-rate home loans. Following the RBI’s move, banks and other lending institutions are likely to lower their interest rates on these loans. For home loan borrowers, this means a reduction in their monthly payments, making it easier to manage finances.
This rate cut comes at a crucial time when many borrowers are feeling the strain of rising living costs. With home loan rates expected to become more affordable, this move could boost consumer confidence and encourage spending in the housing sector. The RBI’s decision reflects its efforts to balance economic growth with inflation control, ensuring that borrowers are not overly burdened while maintaining stability in the broader economy. Overall, this decision is expected to bring significant relief to home loan borrowers across the country.
How Much Will You Save?
Let us look at a new example. Assume one has a car loan of Rs 10 lakh at a 9.5% interest rate for five years. The abatement of interest by 25 basis points has brought the rate to 9.25%. The following is the effect on your EMI:
The old EMI (at 9.5%): Rs 20,360
New EMI (at 9.25%): Rs 20,090
This shows a saving of Rs 607 every month. So, approximately Rs 7,284 is saved in one year.
It may not make a huge difference for some, but it surely is a matter of great importance for many borrowers. Savings will, of course, count even more in the case of a 20- or 30-year-long loan. It may be further reduced at the next RBI Monetary Policy Meeting, bringing in more savings.
