The Reserve Bank of India’s monetary policy decisions directly affect the interest rates on your loans. When the RBI changes the repo rate, banks adjust their lending rates accordingly, which impacts your EMI on floating-rate loans.
Understanding Repo Rate and Its Impact
The repo rate is the rate at which commercial banks borrow from the RBI. When the repo rate decreases, banks can borrow money more cheaply, and this benefit is typically passed on to borrowers through lower lending rates. The current repo rate stands at 6.25%, down from a peak of 6.50% in 2024.
Impact on Floating Rate Home Loans
If you have a floating-rate home loan, a 0.25% rate cut can reduce your EMI by ₹800-1,200 per month on a ₹50 lakh loan. Alternatively, banks may keep the EMI same but reduce the loan tenure, saving you significant interest over the loan lifecycle.
Fixed vs Floating: What Should You Choose?
In a declining interest rate environment (like now), floating rate loans are advantageous as you benefit from each rate cut. Fixed rate loans provide certainty but may cost more in the long run when rates are falling. Most financial advisors recommend floating rates for home loans given the current economic outlook.
What Should Existing Borrowers Do?
Contact your bank to ensure the rate cut is reflected in your loan account. Consider balance transfer to a lender offering lower rates if your current bank is slow to pass on benefits. Use any EMI reduction to make prepayments and reduce your loan tenure.
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