How would 25 bps RBI rate cut reduce monthly home loan EMI and tenure? EXPLAINED

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday, February 8, decided unanimously to reduce the policy rate by 25 basis points to 6.25 per cent from 6.5 per cent. The central bank has decided to slash the key repo rate for the first time in nearly five years.

The RBI also lowered its growth forecast for the Indian economy to 6.7 per cent, citing the headwinds of geopolitical tensions, protectionist trade policies, volatility in international commodity prices, and uncertainties in the financial markets. 

What does this mean for borrowers?

This interest rate cut will prove significant for borrowers who have taken out a home loan or personal loan, among other borrowings. This 25 basis point rate cut will reduce their EMI amounts, provided the banks decide to transfer interest rate relief to the economy’s borrowers.

On the investments front, government Treasury Bills will become cheaper as the lending rates (repo rates) are reduced. Other loans based on a floating interest rate will also become cheaper, reducing the borrowers’ EMI burden.

Experts think that if a bank decides to pass on 10 to 15 basis points of the interest rate relief to the customers, then this will be beneficial to bring down the monthly home loan EMI, along with the tenure.

Expert View

On home loan EMI reduction, Jitendra Solanki, a SEBI-registered tax and investment expert, explained how commercial banks pass on interest rate relief to new home loan borrowers, which in turn is expected to bring down the monthly cost of EMI payment.

“For a new home loan borrower, one’s monthly EMI on a home loan for a tenure of twenty years will be reduced by around 1.80 per cent if the banks pass on 25 bps relief to its customers,” said Solanki.

“However, looking at the history, banks are expected to pass on 10 to 15 bps interest rate relief to their customers. If a bank passes on 15 bps interest rate relief to a new home loan borrower, then one’s monthly home loan EMI for a twenty-year tenure will be reduced to around 1.25 per cent,” said the tax expert.

Reducing the EMI tenure is crucial for existing home loan payers. Passing on the RBI rate cut to customers will encourage home loan payers to reduce the tenure after getting a 25 bps home loan interest rate cut.

“Existing home loan EMI payers can choose to reduce their monthly EMI or the tenure. As one is already paying the home loan EMI, paying that amount further won’t be a big challenge. So, the best practice is to get one’s home loan tenure reduced. If a home loan payer chooses to reduce the home loan tenure, a twenty years (140 months) home loan of ₹20 lakh will be reduced to 130 months after getting a 25 bps home loan interest rate cut,” said Pankaj Mathpal, MD & CEO at Optima Money Managers.