Your loan EMIs will decrease as the RBI lowers the repo rate. How Much Will You Save? RBI’s Repo Rate Cut’s Effect: 

Borrowers have good news! In addition to lowering EMIs for current borrowers, the RBI’s repo rate drop will lower the cost of personal, vehicle, and house loans for new borrowers. 

The RBI’s Monetary Policy Committee (MPC) has lowered interest rates by 25 basis points (bps), which will lessen the burden of EMIs for the middle class, just days after the government announced income tax relief. This implies that lower-cost loans will be advantageous to both current and potential borrowers. 

The interest rate at which the RBI loans money to banks, known as the repo rate, dropped from 6.50% to 6.25% following the most recent rate cut. 

Since the COVID period (May 2020), the RBI has lowered interest rates for the first time. The repo rate was maintained at 4% from May 2020 to April 2022. But starting in April 2022, the RBI progressively raised it to 6.5% by February 2023. They have now finally lowered it once more after maintaining it at the same level for two years. 

It is anticipated that banks will follow suit and pass on the savings to clients when the RBI reduces key policy rates. 

RBI’s Repo Rate Cut’s Effect: How Much Will You Save? 

Let’s examine a few instances: 

Example of a Home Loan:  Let’s say you have a ₹50 lakh home loan with a 20-year term and an 8.5% interest rate. Your interest rate falls to 8.25% following a 25 basis point decrease. This is how your EMI is impacted: 

• At 8.5%, the old EMI was worth ₹43,059; at 8.25 percent, the new EMI was worth ₹42,452. 
• Savings per month: ₹607 
• Savings during the year: ₹7,284 

Even though ₹607 a month might not seem like much, over the course of 20–30 years, this little cut adds up to substantial long-term savings. Savings may rise if the RBI makes additional cutbacks in subsequent meetings. 

Keep in mind that this is only an estimate. The way your bank modifies loan rates will determine how much your actual EMI decrease is. Spread and MCLR (Marginal Cost of Funds Based Lending Rate) are the two parts that make up your interest rate. Banks determine how much of the profit to pass on to clients, even though MCLR is predicted to decline following the repo rate cut. 

Borrowers of fixed-rate loans will not experience a change in their EMI. 

Personal Loan Example: A 0.25% rate reduction will lower your EMI if you have a ₹5 lakh personal loan with a five-year term and 12% interest: 

• Old EMI: ₹11,282 (at 12%) 
• New EMI: ₹11,149 (at 11.75%) 
• Savings per month: ₹133 
• Savings during the year: ₹1,596

Example of a Car Loan:

A 25 bps rate reduction may affect your EMI in the following ways for a ₹10 lakh car loan with a 7-year term at 9.5% interest: 

• Old EMI: ₹16,659 (at 9.5%) – New EMI: ₹16,507 (at 9.25%) 
• Savings per month: ₹152 
• Savings during the year: ₹1,824 

RBI’s Repo Rate Cut’s Effect: Further Effects on Lending and Banking 

The RBI also lowered the Cash Reserve Ratio (CRR) by 25 basis points on December 14 and December 28, respectively, as part of the most recent policy review (December 2024). 

 CRR: What is it? It is the proportion of a bank’s overall deposits that needs to be held in cash at the RBI. Banks can further drop interest rates on loans when they have more money to lend due to a lower CRR. 

Concluding remarks 

For homebuyers, auto buyers, and borrowers of personal loans in particular, this repo rate reduction is fantastic news. Loan EMIs will decrease if banks fully pass the benefit on, saving millions of borrowers money. 

To optimize your savings if you already have a loan, be abreast of any changes to your bank’s interest rates. Additionally, it might be the ideal moment for you to take out a new loan if you have any plans to do so. 

Also Visit-

New vs. Old Tax Regime 2025: Latest Income Tax Slabs, Exemptions & Savings Explained