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RBI Repo Rate Cut: The Reserve Bank of India (RBI) on Friday reduced its policy repo rate by 25 basis points to 5.25%. RBI Governor Sanjay Malhotra said the decision was taken keeping in mind that evolving geopolitical and trade environments continue to weigh on the outlook. While headline inflation remains above target in advanced economies, pressures in emerging markets are contained, allowing room for accommodative monetary policy.
So why is this important, and how does the RBI’s decision on repo rate affect you?
When people apply for a home loan, they usually check factors like interest rates, repayment tenure and monthly EMIs. Yet one key element often goes unnoticed: the repo rate. Simply put, the rate your bank charges on a home loan is linked to the lending rate at which the RBI provides funds to banks.
Sounds complex? Let us break it down for you.
Think of repo rate this way: when you are short of money, you turn to a bank or financial institution. But what happens when these institutions themselves face a cash crunch, especially during periods like inflation?
They approach the country’s central bank — the RBI. Financial institutions borrow money from the RBI at a specific interest rate, which is known as the repo rate. In simple terms, the repo rate is the rate at which the RBI lends to banks and other financial institutions when they run low on funds.
The term “repo” means “repurchasing option”. To borrow from the RBI, financial institutions use government securities such as bonds and treasury bills as collateral. They sell these securities to the RBI and agree to buy them back later at a set price.
Now that the basics are clear, here’s why the repo rate matters.
The repo rate is central to India’s monetary policy and is a crucial tool for managing inflation. During inflation, the RBI raises the repo rate. As a result, financial institutions must pay more interest when borrowing from the central bank.
This makes lending costlier, prompting them to act in two ways. A rate hike makes all types of loans — home, auto and personal — more expensive. Borrowers end up facing higher interest charges and increased EMIs. First, they increase interest rates on deposits, encouraging customers to keep money in their bank accounts for better returns. This reduces liquidity in the market and slows economic activity.
Second, they hike interest rates on loans. Higher borrowing costs discourage people from taking fresh loans and reduce spending. This again brings down liquidity and demand.
Together, these measures help cool inflation. But what happens when the economy moves toward deflation?
In such periods, the RBI cuts the repo rate. Lower borrowing costs and reduced returns on deposits encourage businesses to borrow and invest. With more money circulating in the economy, growth picks up.
With the RBI cutting down the repo rate to 5.25%, the real estate sector is looking at a further push. The rate cut impacts not just new applicants but also those already repaying loans under floating interest rates. However, loans taken at fixed interest rates — such as many personal and car loans — remain unchanged. For these borrowers, repo rate fluctuations do not affect monthly instalments.
Any increase in the repo rate is usually passed on to home buyers taking loans. Typically, lenders extend the loan tenure to absorb the higher rate, meaning borrowers pay EMIs for a longer period and ultimately shell out more interest.
The real estate industry is hopeful of a boost to the sector. Industry players on Friday, after RBI Governor Malhotra announced the repo rate cut, said that it would give homebuyers relief. Binitha Dalal, founder and managing partner of Mt K Kapital, says: “The RBI’s rate cut is a welcome move that comes at a crucial time for the economy. It will increase purchasing power in the hands of consumers and allow households to access loans, including home, car and personal loans, at more comfortable rates. This is likely to to boost the housing sales and support the momentum for the last quarter of the financial year.”
Amrita Gupta, director of the Manglam Group, said the RBI’s decision will significantly support housing demand in Tier-2 and Tier-3 cities, where affordability plays a central role in purchase decisions and homebuyers are particularly sensitive to EMI movement.
Ashish Agarwal, director of AU Real Estate, said: “The repo rate reduction directly brings down the cost of a home loan. Even a small dip in EMI has a powerful psychological effect on buyers who are calculating their long term commitment. For young families and first time homeowners this change can make the difference between postponing a purchase and moving ahead with confidence. We expect more fence sitters to step into the market now that affordability has improved.”
