RBI Decision on Repo Rate: What It Means for Home Loan EMIs and FD Returns

The Reserve Bank of India (RBI) is set to announce the updated repo rate on Friday. The economists have mixed forecasts, as some think a 25-basis-point repo rate cut is likely given the 0.25 retail inflation rate recorded in October, while others expect the RBI to prefer to keep the rate unchanged with the second quarter GDP growth at 8.2%, beating estimates.

Repo Rate

The repo rate is the interest rate at which the RBI lends money to commercial banks for short periods. A repo rate change will lead banks to cut interest rates on loans and deposits, whereas an unchanged repo rate would stabilise the cost of borrowing and the returns on deposits.

Impact on Home Loan EMIs

For borrowers, the biggest concern is the monthly instalment, known as EMI (Equated Monthly Instalment), which is a fixed amount a borrower pays every month to repay a loan. It includes both the principal amount and the interest charged by the bank.

If the RBI cuts the repo rate by 25 basis points-which means 0.25 per cent-banks are likely to reduce interest rates on home loans. For example, a rate cut could reduce the EMI by nearly 1,000 rupees per month on a home loan of 50 lakh rupees taken for 20 years. Over the full loan period, this change translates into around 2.5 lakh rupees.

Borrowers won't experience any immediate relief if the RBI chooses to maintain the current rate. However, stability in rates may help banks manage their lending better and ensure that earlier rate cuts are passed on smoothly.

What Do Investors Do?

Borrowers can rearrange their loan repayment strategy as per the decision. If RBI opts for a rate cut, the financial planners advise them to increase the EMI amount by 5 to 10 per cent. This would help them shorten the loan tenure and cut the total interest paid. Another option is to pay one extra EMI every year. For a loan of 30 lakh rupees over 20 years, this simple step could reduce the repayment period by nearly three years.

Another considerable strategy is prepayment. Prepaying a lump sum amount towards the loan whenever possible, for example at a time when receiving annual bonuses or savings maturity, can help reduce the outstanding loan balance and cut future interest costs. Most banks allow partial prepayment without penalty. Borrowers can also refinance their loans. Refinancing means shifting the loan to another bank that offers a lower interest rate. Even a difference of half a percent in interest can save several lakh rupees over the life of the loan. A financial expert, Amit Goel of Goel Ganga Developments, said borrowers should not wait passively. Even a modest increase in EMI acts as a buffer against future hikes.

Impact on Fixed Deposit Returns

The fixed deposit interest rate is likely to fall if the central bank cuts the repo rate. It would be challenging for depositors, especially senior citizens, who predominantly invest their retirement benefits in fixed deposits.

The decrease means depositors will earn less on their savings. If the RBI keeps the rate unchanged, deposits can enjoy the current rates until the next rate change comes into force. Experts have called for a quick intervention from the customer's side, such as booking a long-term FD or rearranging investments in a phased manner.

Depositors can also explore alternatives if FD rates fall. Debt mutual funds, government bonds, and small savings schemes often provide better returns. Senior citizens should look for special FD schemes that offer higher interest rates, as many banks provide these benefits.