RBI MPC meeting: Repo rate cut by 25 bps, home loan EMIs, interest rates set to fall

Homebuyers are set to get some relief after the Reserve Bank of India (RBI) cut the repo rate by 25 basis points (bps) to 5.25 percent on December 5, a move that would lower EMIs and interest rates.

The decision aligns with a Moneycontrol’s poll of 18 economist, treasury heads of banks and fund managers, with majority pencilling in a 25 bps cut.

The RBI MPC has now lowered the repo rate by 125 bps this calendar year. The rate cutting cycle began in February, which saw the first reduction after May 2020.

Between February and June, the rate was brought down from 6.5 percent to 5.5 percent, with the MPC maintaining status quo in August and October.

Banks such as HDFC Bank, ICICI Bank, State Bank of India (SBI), Bank of Baroda and Canara Bank offer home loan at rates starting at 7.3-7.9 percent.

Since October 1, 2019, the RBI mandated that all new floating-rate retail loans be linked to an external benchmark, which is the repo rate for most banks, which ensures that changes in policy rates are transmitted to borrowers more quickly and transparently.

Follow our live blog for the latest on the RBI policy decisions

Impact on existing borrowers

With the RBI lowering the repo rate, your home loan interest rates and EMIs will fall too.

Typically, unless explicitly asked, banks keep EMIs unchanged after repo rate revisions — they shorten tenures in the case of a cut.

For instance, if your Rs 50 lakh, 20-year home loan at 8.5 percent interest was disbursed in January, you would have gained significantly from a 125-bps rate reduction. This would shorten your loan tenure to 198 months and save around Rs 18.32 lakh in interest payments.

If you choose to reduce your EMI amount instead, your interest savings will be relatively lower. You will save around Rs 9.29 lakh instead of Rs 18.32 lakh by keeping EMIs constant.

Strategy to prepay home loan

Home loans are typically the largest liability for individuals, BankBazaar CEO Adhil Shetty said. A low-interest cycle can significantly reduce this burden.

For existing loans, retaining the higher EMI amount and reducing the tenor can maximise benefits. According to Shetty, a 125-bps rate reduction, combined with a 5 percent increase in EMI, can help borrowers close their 20 years existing loan in 15 years. This not only saves interest but also allows individuals to focus on other savings and investments, as their liability ends earlier.

New vs existing borrowers

A BankBazaar comparison of home loan rates on January 31 and November 28 shows that most public sector banks have reduced rates for fresh home loans by 100 bps, in line with the RBI policy decisions.

However, some private sector banks have not transmitted the entire benefit to new borrowers, choosing to adjust the spread over the repo rate instead.

Borrowers with existing loans at high interest rates may benefit from switching to repo-linked products, which can help reduce interest costs over the long term, according to financial advisers.