RBI cuts Repo Rates by 25 Basis Points

RBI cuts Repo Rates by 25 Basis Points

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

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

For example, if Rs. 25lakh home loan istaken for a tenure of 10-year, it translates into an EMI of about Rs. 31,332 atthe highest interest rate as per the current interest rate offered by SBI is in8.55-8.75 percent range. If the full benefit of the repo rate cut is passed onand the new interest rate comes down to 8.5 percent, the EMI outgo will comedown to around Rs. 30,996.

People may not be benefitted muchfrom the rate cut today with the RBI deferring the decision to link all newfloating rates personal or retail loans (housing, auto etc.) to externalbenchmarks like the repo rate. The existing home loan customers may have towait awhile to see an impact on their EMIs because of the reset date factor. Theinterest rate of the loan for the borrower is changed only on the reset periodwhich is typically 1 year.  

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