A rate cut and a lending push

RBI’s shift in stance – from ‘neutral’ to ‘accommodative’ – signals status quo or further reduction in repo rates

The 25-bps repo rate reduction announced by the Monetary Planning Committee (MPC) of the Reserve Bank of India (RBI) appears to have sent out a message of intent. The efforts are directed towards addressing the sagging economic growth (RBI has reduced the GDP forecast for FY26 to 6.5% from the earlier 6.7%) and anchoring CPI inflation – forecast reduced to 4% from 4.2% for FY26.

The inflation has cumulatively reduced by 1.6%, from a staggering 5.2% in December 2024 to as low as 3.6% in February 2025. Even food inflation which adversely affects the common man has dipped to a 21-month low at 3.8% in February. The MPC’s repo rate cut from 6.25% to 6% – consecutively for the second time and first for the present financial year – makes banks’ borrowings from RBI much cheaper. Repo rate is the rate at which commercial banks borrow from the central bank.

The MPC’s change in policy stance from ‘neutral’ to ‘accommodative’ is a proactive step. This signals ample liquidity support to the banking system, indicates no immediate repo rate hike, and faster and smoother rate reduction transmission to home loan borrowers. Going forward, we can only expect further reduction in the rates or status quo. The cumulative repo rate reduction by 50 bps in the last three months should boost sagging credit growth, lending to housing, MSME, personal and vehicle loans, and loans to builders/real estate that had taken a beating.

The immediate benefits will be to borrowers whose housing loans are on variable interest rates linked to the repo rate as an External Benchmark Lending Rate (EBLR) and of MSME/ priority sector loans. Most repo rate-linked bank loans are housing loans, MSME, and real estate loans. With ample liquidity support provided by the RBI, the banks will pass on the benefits of the rate cuts to the borrowers of housing and other retail loans to the extent of 25-35 bps by April-May.

For corporates and business loans, the interest rate charged by the banks is normally based on Marginal Cost Lending Rates (MCLR) – these are decided based on the cost of deposits/borrowings by the banks plus loading of tenure premium, and risk weightage based on the borrowers’ credit scores. The interest rates on these loans will be reduced during the normal ‘reset’ months of June/December.

Home loan borrowers from Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) which decide lending rates on internal Prime Lending Rates approved by their boards may not get the rate-cut advantage upfront, like the bank borrowers.

New borrowers benefit

For new borrowers of home loans, car loans, and education loans, the interest rate reduction from the public sector banks and a few big private sector banks will be in the range of 20-35 bps. The housing loan rates can go as low as less than 8%, after a long time. For an existing borrower of a Rs-10 lakh home loan at a 9% interest rate and a tenure of 15 years, the EMI is Rs 10,143. With a reduction in rate by 25 bps, the revised EMI will be Rs 9,994 at 8.75%.

With the borrower getting the transmission benefit of 50 bps, the revised EMI will be Rs 9,847. Furthermore, by retaining the EMI which borrowers are already comfortable with, the loan tenure can be reduced by 8-11 months on account of a 0.5% rate cut. Fresh borrowers get this reduced interest rate advantage straightaway.

The RBI’s decision to expand the scope of co-lending by banks to NBFCs facilitates NBFCs to lend both for priority sector and non-priority sector loans. This is to capitalise on the four Rs – Resources and Reduced interest rates of banks, Reach to tier 2 and tier 3 centres, and Recovery expertise of NBFCs.

It could be argued that the only negative impact of the rate cut is on the deposit rates. There will not be any rate change for the existing depositors who have locked their Fixed Deposits (FD) for a specific tenure. However, new depositors will face reduced FD rates.

It is advisable for senior citizens and people who are dependent on monthly interests for their living expenses to immediately lock their funds in long-term FDs with banks, post offices, HFCs, and rated NBFCs that are offering attractive interest rates above 8% before they reduce their FD rates which can happen any time – some of the banks have already done this.

(The writer is a former banker)