RBI’s repo rate cut: What it means for your loans and FD?

In a bold and unexpected move, the Reserve Bank of India (RBI) slashed the repo rate by 50 basis points (bps) to 5.50% on June 6, offering relief to millions of borrowers across the country. This is the third rate cut in a row, bringing the total reduction to 100 bps.

The decision, announced after the RBI’s three-day Monetary Policy Committee (MPC) meeting, exceeded market expectations of a modest 25 bps cut.

Alongside the repo rate reduction, the RBI also plans to lower the cash reserve ratio (CRR) by 100 bps on four tranches over the year, from 4 per cent to 3 per cent, freeing up an estimated ₹2.5 lakh crore (nearly $29 billion) in liquidity. This double-pronged move is aimed at stimulating lending, boosting economic activity, and lowering borrowing costs for both individuals and businesses.

What is the repo rate, and why does it matter?

The repo rate is the rate at which the RBI lends money to commercial banks. A lower repo rate means banks can borrow funds more cheaply. This, in turn, usually leads banks to reduce interest rates on loans to customers—impacting everything from home loans to auto and personal loans.

Retail floating-rate loans issued after October 2019 are linked to external benchmarks, usually the repo rate, which means that EMIs (equated monthly instalments) adjust according to changes in the repo rate.

Domestic banks typically pass on these rate cuts to borrowers either fully or partially, depending on their interest reset cycle, which generally occurs within three to six months.

How much will borrowers save?

If banks fully pass on the 50 bps cut, the savings for borrowers could be substantial:

Home loan of ₹50 lakh at 8.70 per cent for 30 years:

Current EMI: ₹39,136

Interest rate drops by 50 bps to 8.20 per cent:

New EMI: ₹37,346

Monthly Savings: ₹1,790

Annual Savings: ₹21,480

While the monthly savings might not seem like much, over a 30-year term, even small monthly savings add up to lakhs of rupees and bring real long-term financial relief.

Now let's say you took a car loan or a personal loan of ₹5 lakh at 12 per cent for 5 years:

Current EMI: ₹11,122

Interest rate drops by 50 bps to 11.50 per cent:

New EMI: ₹10,963

Monthly Savings: ₹159

Annual Savings: ₹1,908

Borrowers can choose to enjoy the lower EMIs or retain their existing payments and shorten the loan tenure, reducing overall interest paid.

Impact on FD Investors

While the move is positive for borrowers, it could hurt bank fixed deposit (FD) investors. As the RBI’s lending rates drop, banks are expected to reduce FD rates across various tenures, leading to lower returns.

Financial advisors suggest locking in current FD rates before they decline or considering alternatives like post office small savings schemes.

The RBI’s aggressive rate cut comes amid cooling inflation and global uncertainty. It aims to support domestic consumption and revive credit growth. Borrowers are advised to watch how their banks react to the transmission of rate cuts.

For those with existing loans or planning to borrow, the current environment presents a golden opportunity to ease financial pressure or invest in big-ticket purchases like homes or vehicles.