Big relief for home loan borrowers as EMIs to fall by 1.8% on a 20 year loan tenure as RBI reduced repo ra – The Economic Times

In a big relief to home loan borrowers RBI has finally reduced the repo rate by 25 basis points in its monetary policy meeting on February 7, 2025. This cut comes after almost after a gap of 5 years during which the home loan borrowers only saw either rates being hiked or being stagnant. After RBI repo rate cut, home loan lenders are expected to reduce their interest rate on floating rate home loans.

“There were strong expectations for a modest 25 bps rate cut in today’s monetary policy meeting, and the RBI has delivered on those expectations. The decision was driven by the need to support GDP growth, inflation remaining within a comfortable range for the past few quarters, and prevailing tight liquidity conditions,” says Sahil Agarwal, CEO, Nimbus Group.

Adhil Shetty, CEO, BankBazaar.com says “This policy decision marks the first Monetary Policy Committee (MPC) meeting chaired by the newly appointed RBI Governor, Sanjay Malhotra. This decision is expected to bring relief to loan borrowers, as banks are likely to lower lending rates for home loans, auto loans, and business credit. Lower borrowing costs will encourage spending and investment, providing a much-needed boost to economic activity.”

Also Read: Last window for FD investors to book fixed deposits at higher interest rate

We tell you if you can expect further repo rate cut this year and how best you can utilize the current interest rate cut.

Retail inflation has been the biggest focus area for RBI as the central bank has a mandate to keep it around 4%. Though the retail inflation as come down significantly however it may take some more time to bring it to durably within the RBI’s comfort zone.

“CPI inflation for FY26 is projected at 4%, with January likely below 4.5%. December inflation eased to 5.22%, marking four consecutive months above 5%. Food inflation dropped to 8.4% from 9% in November,” says Bajaj Broking Research.

“Inflation is easing (Dec 2024 CPI: 5.2%, expected to fall to 4.5%-4.7% in coming months), but risks persist from imported inflation due to a depreciating INR (₹87/USD),” says Arsh Mogre, Economist, Institutional Research, PL Capital Group – Prabhudas Lilladher.

For any future repo rate cut to materialise a durable fall in retail inflation will be essential.

A significantly fall in GDP in July-Sept quarter has become a big concern for the economy and the central bank can not remain untouched from it. “Growth is clearly slowing (FY25 GDP projected at 6.4% vs. 8.2% in FY24), driven by a weak investment cycle and cautious consumption,” says Mogre. A slowing growth in the economy may put pressure on RBI to consider further repo rate cut.

A significant fall in rupee exchange rate against USD has also been a concern. “INR has depreciated to ₹87/USD, down from ₹84.7/USD in Dec 2024, driven by stronger USD, rising US 10Y yields (4.51%), and $7.5bn FPI outflows since Nov 2024. The narrowing India-US rate differential is increasing capital outflow risks, forcing RBI to calibrate its easing cycle cautiously to avoid excessive rupee weakness. Any disorderly INR depreciation would raise imported inflation risks and require forex reserve depletion to stabilize markets,” says Mogre.

For any repo rate cut to happen in future retail inflation has to be tamed. “Inflation remains above the RBI’s medium-term target of 4%, and increasing global trade-related uncertainties have added complexity to the economic outlook. The government’s fiscal prudence, reflected in the recently announced Union Budget, points toward a downward trajectory for interest rates. While the broader direction seems clear, the precise timing of the next rate cut remains uncertain,” says Dhiraj Relli, MD & CEO of HDFC Securities.

A lower inflation may lead to a significant rate cut during the year. “Further cuts of 50-75 bps in CY25 will depend on inflation sustainability and global monetary conditions,” says Mogre.

A reduction of interest rate by 0.25% means that home loan borrowers will have two option either to go for a reduction in EMIs or reduce the tenure of the loan which will help them in clearing their home loan outstanding faster. On a home loan of Rs 30 lakh taken for 20 years, if the interest rate falls from 9% to 8.75% the EMI will fall from Rs 26,992 to Rs 26551, which is a fall by Rs 480 or 1.78%.

Shetty of Bankbazaar.com explains, assume you took a loan of Rs.50L one year ago at 9% for 20 years. In this case, the total EMI paid over the duration of the loan comes to approximately Rs.58L. A repo rate cut means that the entire reduction is transmitted. Typically, the bank will maintain your EMI. This means that you save on the total interest you repay as well as reduce your tenor. So, in this case, your loan is at 9% in the first year and reduced after that in proportion to the rate cut. If the rate cut is for 50 basis points, your loan is reset to 8.5%. Your overall interest will reduce to approximately Rs.50L: savings of Rs.8L. Your overall tenor will reduce to 222 months, meaning your loan will end 18 months earlier. If the rate cut is for 25 basis points, your tenor reduces by 10 months to 230 months while your interest comes down to Rs.53.6L, a savings of Rs.4.4L over the duration of your loan.

Source: Bankbazaar.com

For prospective home loan borrowers this rate cut will increase their affordability. “The 25 basis point cut in the repo rate is a welcome move, particularly for homebuyers in the affordable and mid-segment categories. Given that these housing segments are highly cost-sensitive, a lower EMI burden will undoubtedly encourage more buyers to take the plunge into homeownership,” says Udit Jain, Director, OneGroup.

“It lightens EMIs, boosts investments, and signals a pro-growth stance. Coupled with income tax breaks for incomes up to ₹12 lakh in the Union Budget, it widens the path to homeownership for many aspiring buyers,” says Amit Goyal, Managing Direct, India Sotheby’s International Realty.

“This rate reduction is set to bring down lending rates, making borrowing more accessible and affordable for consumers. In particular, it serves as a strong catalyst for the real estate sector, encouraging fence-sitting homebuyers to move forward with their purchase decisions,” says Aman Sarin, Director & Chief Executive Officer, Anant Raj Limited.

As lenders will offer you the option to go for EMI cut or for a tenure cut, it will be a better option for you to go for a tenure cut by keeping the EMI unchanged as it will save you total interest amount.

Shetty recommends that borrowers with good credit scores seek more aggressive payment options like refinancing to a rate lower by 50 bps or more. If they keep the EMI constant with a lower rate — let’s say 8.25% — they will secure per-lakh savings of ₹14,480 over the remaining tenor. These savings of nearly 15% per lakh are substantial.

Assuming the rate kicks in from April 1 after 12 EMIs of this loan have been paid, we get per-lakh interest savings of ₹3002 from the rest of the year. On a loan of ₹50 lakh, this implies savings of ₹1.50 lakh for the second year of the loan.

Now, if we see these savings in the backdrop of additional savings from income tax slab hikes, a salaried individual can have substantial gains for FY25-25.

For instance, someone earning a gross salary of ₹25 lakh, the tax savings are likely to be ₹1.14 lakh, and with a ₹50 lakh home loan for 20 years with 19 years left, the interest savings as mentioned above are ₹1.50 lakh. This gives us total savings of 2.64 lakh for the year, or ₹22,000 a month.