RBI cuts Repo Rates by 25 Basis Points

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The rate-sensitive real estate and auto sector are likely to get a major boost as the six-member monetary policy committee headed by Reserve Bank of India (RBI) Governor Shaktikanta Das voted to reduce the repo rate by 25 basis points (bps) to 5.75 percent on Thursday.

Repo rate is the interest rate at which the RBI lends money to banks and this is the third consequent rate cut. When the cost of borrowing goes down for banks they can choose to lower their respectively marginal cost of funds based lending rate which is the minimum interest rate that a bank will charge on the loan and directly impacts the EMIs.

For example, if Rs. 25lakh home loan is taken for a tenure of 10-year, it translates into an EMI of about Rs. 31,332 at the highest interest rate as per the current interest rate offered by SBI is in 8.55-8.75 percent range. If the full benefit of the repo rate cut is passed on and the new interest rate comes down to 8.5 percent, the EMI outgo will come down to around Rs. 30,996.

People may not be benefitted much from the rate cut today with the RBI deferring the decision to link all new floating rates personal or retail loans (housing, auto etc.) to external benchmarks like the repo rate. The existing home loan customers may have to wait awhile to see an impact on their EMIs because of the reset date factor. The interest rate of the loan for the borrower is changed only on the reset period which is typically 1 year.  

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