Home Loan EMIs: The Reserve Bank of India (RBI) under new governor Sanjay Malhotro reduced the policy repo rate by 25 bps to a staggering 6.25% from the previous 6.50%. The latest rate cut is for the first time in about 5 years. This 25 bps cut is expected to reduce home loan EMIs, offering a major boost to home buyers including new owners. Interestingly, experts also said RBI's rate cut is a bonus to the zero tax relief provided on Rs 12 lakh income under Budget 2025.
RBI Policy Repo Rate:
Six-member MPC under the chairmanship of Malhotra, unanimously decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25%.
Consequently, the standing deposit facility (SDF) rate also saw a 25 bps cut to 6% from earlier 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate were trimmed to 6.50% from the previous 6.75%.
RBI continued its neutral monetary policy stance and remained unambiguously focused on a durable alignment of inflation with the target while supporting growth.
How Does A Repo Rate Cut Impacts Home Loan EMIs?
When a homebuyer takes loans from banks or other financial institutions, they are charged with a certain rate of interest. This is called as cost of credit. The borrowers are required to repay the loan amount to banks including the amount of interest which is called EMIs.
EMIs stand for 'Equated Monthly Installments' which is a breakup of loan principal amount + interest rate on that loan. EMIs are obligatory to be paid every month, depending upon the due date assigned by banks.
In a similar pattern, banks and financial institutions borrow money from RBI by selling their government securities or other bonds. Banks do this to maintain adequate liquidity. The repo rate is just like the rate of interest, that banks pay to RBI for the money they borrowed.
When the repo rate is high, the cost of credit for banks is high. And hence, they pass on that impact to end consumers such as borrowers. In simple words, if a repo rate is high, banks increase lending rates. But when the repo rate is cut, the cost of credit is cheaper for banks and hence they reduce the lending rates that they offer to borrowers on home loans, personal loans, car loans, education loans and more.
When RBI hiked the repo rate by 250 bps points from May 2022 to February 2025, taking the key rate to a multi-year high of 6.50%. The home loan rates had increased significantly accordingly.
Data from December 2024 policy showed that in response to 250 bps hike since May 2022, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans of SCBs have increased by 203 bps and 118 bps, respectively, from May 2022 to October 2024. Hence, EMIs were expensive.
Also, banks have shifted to repo-linked lending rate (RLLR) since October 2019, replacing the old benchmark Marginal Cost of Fund Based Lending Rate (MCLR). The RLLR benchmark means that banks cannot lend term loans below this rate.
Calculation of RLLR = Repo Rate + Spread
Hence, a repo rate cut comes as a positive factor for home buyers.
What do experts say?
Amit Goyal, Managing Direct, India Sotheby's International Realty said, "The RBI's 0.25% rate cut after five long years-is the much-needed oxygen for the Indian economy, more particularly for the real estate sector. It lightens EMIs, boosts investments, and signals a pro-growth stance. Coupled with income tax breaks for incomes up to Rs 12 lakh in the Union Budget, it widens the path to homeownership for many aspiring buyers."
During her Budget 2025 speech, to taxpayers, FM announced that up to Rs 12 lakh of normal income, tax rebate is being provided in addition to the benefit due to slab rate reduction in such a manner that there is no tax payable by them.
Explaining in detail how the repo rate impacts EMIs, Piyush Bothra, Co-Founder and CFO, of Square Yards said, the Reserve Bank of India's decision to cut the repo rate by 25 basis points to 6.25% is a welcome move for the real estate market. This will lower borrowing costs for home buyers, making home loans more accessible and improving buyer sentiment. Additionally, it could enhance liquidity in the banking system, easing access to financing for developers.
But will banks provide repo rate benefits immediately? As per Debopam Chaudhuri, Chief Economist, Piramal Group, "Massive liquidity boost over last few weeks resulted in the weighted interbank call rate to close below the repo rate a day before policy announcement. However, in my opinion the transmission will be delayed than usual, especially through bank loans linked to MCLR. It is likely that some of the banks could increase the share of MCLR loans over EBLR, to preserve margins at a time when deposit mobilisation remains sluggish."
Nonetheless, both rate cut and Budget tax reliefs are a boon to homebuyers.
Vimal Nadar, Head of Research at Colliers India said, as housing demand had begun to stabilize after witnessing record sales in the last 2-3 years, this rate cut comes at an opportune time and will have a significant bearing on boosting homebuyer sentiments. The rate cut along with the recent budgetary announcements related to the creation of Urban Challenge Fund and tax reliefs under the new regime, are likely to stimulate urban growth and enhance domestic consumption. Higher disposable income and lowering of financing costs stand to benefit homebuyers and developers alike.
For developers, Kaushal Agarwal, Co-Founder and Director at The Guardians Real Estate Advisory said, it could ease financial pressures and encourage new project launches. The RBI's inflation projections of 4.8% for FY'25 and 4.2% for FY'26, along with a GDP growth estimate of 6.7% for the next fiscal year, indicate a stable economic outlook. These factors may contribute to a more balanced environment for the real estate sector, supporting demand across residential and commercial segments.
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