In a major relief for home loan borrowers, the RBI has cut the repo rate by 25 basis points in its monetary policy meeting on February 7, 2025. This marks the first reduction in nearly five years, during which borrowers faced either rate hikes or stagnant rates. Following this move, lenders are expected to lower interest rates on floating home loans.
According to media reports, experts have welcomed the RBI’s decision to cut the repo rate by 25 basis points. Sahil Agarwal, CEO of Nimbus Group, stated, *”There were strong expectations for a modest 25 bps rate cut in today’s monetary policy meeting, and the RBI has delivered on those expectations. The decision was driven by the need to support GDP growth, inflation remaining within a comfortable range for the past few quarters, and prevailing tight liquidity conditions.”*
Adhil Shetty, CEO of BankBazaar.com, highlighted the significance of this move, saying, *”This policy decision marks the first Monetary Policy Committee (MPC) meeting chaired by the newly appointed RBI Governor, Sanjay Malhotra. This decision is expected to bring relief to loan borrowers, as banks are likely to lower lending rates for home loans, auto loans, and business credit. Lower borrowing costs will encourage spending and investment, providing a much-needed boost to economic activity.”*
Impact of 25 bps Rate Cut on Home Loan EMIs
The recent 25 basis points (bps) cut in the repo rate by the Reserve Bank of India (RBI) is expected to bring relief to home loan borrowers. However, the transmission of this rate cut will vary depending on the type of interest rate regime applicable to different loans.
For loans linked to the repo rate, the impact will be faster. However, the exact timing of the reduction in EMIs for existing borrowers will depend on the rate reset dates set by their respective lenders. Borrowers with floating rate loans linked to older benchmarks, such as MCLR or base rate, may experience a slower transmission of benefits.
According to Naveen Kukreja, Co-Founder and CEO of Paisabazaar, existing borrowers will continue to repay their loans at current interest rates until the new rates are implemented by their lenders.
A 0.25% reduction in interest rates gives borrowers two choices:
1. Lower EMIs – This reduces the monthly financial burden.
2. Shorter Loan Tenure – This helps in repaying the loan faster, saving on interest costs.
For example, on a ₹30 lakh home loan for 20 years, if the interest rate drops from 9% to 8.75%, the EMI will decrease from ₹26,992 to ₹26,551, saving ₹480 per month (about 1.78%).
For a ₹50 lakh home loan over 30 years, the impact of a 25 bps rate cut can be seen in the following calculation.
What should existing home loan borrowers do now
Lenders offer borrowers the option to either reduce their EMI or shorten the loan tenure when interest rates drop. Experts suggest that opting for a tenure cut while keeping the EMI unchanged is a smarter financial move, as it helps save more on total interest payments.
For example, suppose a borrower took a ₹50 lakh home loan at 9% interest for 20 years (240 months). The total EMI payments over the loan tenure would be around ₹58 lakh.
If the repo rate is reduced by 50 basis points (bps), the interest rate falls to 8.5%, reducing the total interest paid to around ₹50 lakh, saving ₹8 lakh. Additionally, the loan tenure would reduce by 18 months (ending in 222 months instead of 240).
If the rate cut is 25 bps, the total interest reduces to ₹53.6 lakh, saving ₹4.4 lakh, and the tenure shortens by 10 months to 230 months.
By maintaining the same EMI, borrowers can repay their loans faster and save significantly on interest costs.
New home buyers will have higher affordability
For prospective home loan borrowers this rate cut will increase their affordability. “The 25 basis point cut in the repo rate is a welcome move, particularly for homebuyers in the affordable and mid-segment categories. Given that these housing segments are highly cost-sensitive, a lower EMI burden will undoubtedly encourage more buyers to take the plunge into homeownership,” says Udit Jain, Director, OneGroup.
“It lightens EMIs, boosts investments, and signals a pro-growth stance. Coupled with income tax breaks for incomes up to 12 lakh in the Union Budget, it widens the path to homeownership for many aspiring buyers,” says Amit Goyal, Managing Director, India Sotheby’s International Realty.
“This rate reduction is set to bring down lending rates, making borrowing more accessible and affordable for consumers. In particular, it serves as a strong catalyst for the real estate sector, encouraging fence-sitting homebuyers to move forward with their purchase decisions,” says Aman Sarin, Director & Chief Executive Officer, Anant Raj Limited. “A salaried person with a gross income of 25 lakh and a home loan of 50 lakh (20 years, 9%, 12 EMIs paid by March 2025) can hope to save a total of 1.37 lakh in FY2025-26 or 11,461 per month. This will be through a combination of interest savings on the home loan rate reduction of 25 BPS and the tax savings from higher tax slabs from April 1” says Shetty.
Retail inflation continues to remain high
Retail inflation has been the biggest focus area for RBI as the central bank has a mandate to keep it around 4%. Though the retail inflation as come down significantly however it may take some more time to bring it to durably within the RBI’s comfort zone.
“CPI inflation for FY26 is projected at 4%, with January likely below 4.5%. December inflation eased to 5.22%, marking four consecutive months above 5%. Food inflation dropped to 8.4% from 9% in November,” says Bajaj Broking Research.
“Inflation is easing (Dec 2024 CPI: 5.2%, expected to fall to 4.5%-4.7% in coming months), but risks persist from imported inflation due to a depreciating INR ( 87/USD),” says Arsh Mogre, Economist, Institutional Research, PL Capital Group – Prabhudas Lilladher.
For any future repo rate cut to materialise a durable fall in retail inflation will be essential.
Growth concerns may put pressure on RBI
A significantly fall in GDP in July-Sept quarter has become a big concern for the economy and the central bank can not remain untouched from it. “Growth is clearly slowing (FY25 GDP projected at 6.4% vs. 8.2% in FY24), driven by a weak investment cycle and cautious consumption,” says Mogre. A slowing growth in the economy may put pressure on RBI to consider further repo rate cu
Foreign exchange pressure
A significant fall in rupee exchange rate against USD has also been a concern. “INR has depreciated to 87/USD, down from 84.7/USD in Dec 2024, driven by stronger USD, rising US 10Y yields (4.51%), and $7.5bn FPI outflows since Nov 2024. The narrowing India-US rate differential is increasing capital outflow risks, forcing RBI to calibrate its easing cycle cautiously to avoid excessive rupee weakness. Any disorderly INR depreciation would raise imported inflation risks and require forex reserve depletion to stabilize markets,” says Mogre. “This decision is expected to widen the gap between US and Indian bond yields, potentially accelerating capital outflows from India. With US bond yields on an upward trajectory, the Indian Rupee (INR) is facing added depreciation pressure, exacerbating currency risks. Given these challenges, the rate cut could prove to be a balancing decision on currency stability and stimulating consumption,” says Umeshkumar Mehta, CIO, SAMCO Mutual Fund.
When will next repo rate cut happen?
For any repo rate cut to happen in future retail inflation has to be tamed. “Inflation remains above the RBI’s medium-term target of 4%, and increasing global traderelated uncertainties have added complexity to the economic outlook. The government’s fiscal prudence, reflected in the recently announced Union Budget, points toward a downward trajectory for interest rates. While the broader direction seems clear, the precise timing of the next rate cut remains uncertain,” says Dhiraj Relli, MD & CEO of HDFC Securities. “With the policy stance remaining ‘neutral,’ the RBI is maintaining flexibility, indicating that future rate actions will depend on economic data. The key focus now will be on how effectively banks transmit this cut and whether it translates into stronger credit demand and sustained economic momentum,” says Sahil Lakshmanan, Chief Business Officer, CarePal Money.
How much repo rate cut can be expected this year
A lower inflation may lead to a significant rate cut during the year. “Further cuts of 50-75 bps in CY25 will depend on inflation sustainability and global monetary conditions,” says Mogre. “For monetary easing to be effective, more rate cuts are needed for a long period of time. Liquidity needs to be easy as well. I feel that the inflation projection of 4.2% for FY26 is a tad optimistic. I expect further rate cuts of 50 bps during the year,” says Sandeep Bagla, CEO, TRUST Mutual Fund. However, a likelihood of an immediate rate cut in next MPC meeting in April appears remote. “Given the weakness in Rupee against the USD Dollar and the uncertainty of tariff by the US government, RBI might delay future rate cuts. RBI will be watchful on the incoming inflation data and the currency movement before taking future rate cuts. As per our expectation, April could be status quo of the interest rates,” says Deepak Ramaraju, Senior Fund Manager, Shriram AMC