RBI’s Repo Rate Cut is a Boon for Borrowers 

The Reserve Bank of India (RBI) has made a pivotal move by cutting its repo rate from 6.5% to 6.25%, marking the first such reduction in nearly five years. This decision comes amid concerns over slowing economic growth and global uncertainties, signaling an attempt to stimulate investment and consumer spending while maintaining economic stability. 

What the Rate Cut Entails 

The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks. A reduction in this rate generally leads to lower borrowing costs for banks, which in turn can make loans more affordable for businesses and consumers. 

RBI Governor Sanjay Malhotra, in his first major policy announcement, emphasized that the decision aligns with the central bank’s neutral stance, creating room for further interventions if economic conditions warrant. While India remains one of the fastest-growing economies globally, signs of stress in investment growth, corporate profitability, and urban consumption have necessitated this policy shift. 

This move is further complemented by previous monetary measures, such as a $18 billion liquidity injection and a 0.5% reduction in the cash reserve ratio (CRR) in December. Additionally, the recent Union Budget introduced a $12 billion tax cut aimed at providing relief to the middle class, reinforcing the government’s broader strategy of spurring economic activity. 

Impact on Home and Auto Loans 

For consumers, the repo rate cut translates into tangible financial relief, particularly for those with home and auto loans. Most floating-rate loans, especially those issued after October 2019, are directly linked to external benchmarks like the repo rate. As a result, banks are expected to pass on the benefits, albeit at varying degrees, to borrowers. 

Home Loan Impact 

Home loan borrowers stand to benefit significantly from the rate reduction. If banks pass on the entire 25 basis points (bps) cut, borrowers with an outstanding home loan of ₹64 lakh at an 8.5% interest rate over 20 years could see their EMIs decrease by approximately ₹1,008 per month. Similarly, all else remaining constant: 

• A ₹75 lakh home loan at 8.5% for 20 years could see an EMI reduction of ₹1,181 per month. 

• A ₹50 lakh loan could see monthly savings of ₹788. 

• A ₹30 lakh loan could see an EMI drop of ₹472. 

These reductions provide much-needed financial flexibility to homeowners, particularly those in metropolitan areas where housing affordability has been a growing concern. 

Auto Loan Impact 

Car and two-wheeler loan borrowers are also expected to benefit, provided banks extend the full benefit of the repo rate cut. Based on a 9.4% pre-cut median interest rate, here’s how much auto loan borrowers could save annually: 

• A ₹5 lakh auto loan (5-year tenure) could result in savings of ₹732 per year. 

• A ₹7 lakh auto loan could lead to annual savings of ₹1,020. 

• A ₹10 lakh auto loan borrower could save ₹1,464 annually. 

For consumers contemplating purchasing a home or a vehicle, the lower interest rates make this an opportune time to finance their dreams at more affordable costs. 

Industry reactions 

Shishir Baijal, Chairman and Managing Director, Knight Frank India 

“We hope that interest rate cuts will be passed on to consumers, making home loan rates more attractive. This, along with the previously announced tax incentives, should stimulate residential demand across various price brackets, especially in the under 5-million-rupee category, which has seen a persistent drop in demand.” 

Ranen Banerjee, Partner and Leader, Economic Advisory, PwC India 

“The new RBI Governor and the MPC delivered the widely accepted 25bps policy rate cut with policy stance as neutral leaving room for it to take further actions in its next meeting. The MPC would have got comfort from the expectation of a moderating food inflation and under check core inflation giving an inflation estimate for FY26 at 4.2%. It has delivered the required monetary policy support to the economy and this combined with the consumption boost from the tax relief announced in the budget should give momentum to demand and pushing the FY26 growth rate to the higher end of the 6.3% to 6.8% growth range anticipated in the Economic Survey.” 

Nirav Choksi, CEO & Co-Founder, CredAble 

“For the first time in five years, the RBI has cut the policy repo rate by 25 basis points to 6.25%. For small businesses, access to capital has always been about speed, flexibility, and sustainability. The 25-bps rate cut lowers the cost of funds, but the real opportunity lies in how FinTechs enhance credit limits for MSMEs. Traditional static limits don’t reflect business realities—fluctuating revenues, seasonal demand, and evolving cash flow needs. The future is dynamic credit allocation, where FinTechs use real-time transaction data, AI-driven risk assessment, and automated cash flow insights to adjust limits proactively. FinTechs can strengthen supply chain financing by enhancing liquidity across B2B ecosystems with flexible financing, allowing suppliers and distributors to access credit seamlessly at better terms. The opportunity now is to create tailored financing solutions that align with cash flow realities, ensuring that MSMEs don’t just survive economic shifts—they thrive in them.” 

Growth and Inflation Considerations 

While the rate cut provides immediate benefits to borrowers, it also reflects the RBI’s careful balancing act between supporting economic growth and maintaining macroeconomic stability. 

The RBI has projected India’s real GDP growth at 6.4% for the financial year ending March, with expectations of 6.7% in Q1 and 7% in Q2 of the next financial year. With global growth remaining tepid, this move aims to shore up domestic demand. 

Inflation remains a key consideration. Retail inflation is expected to hover around 4.8% for the current financial year, with core inflation remaining moderate and food inflation expected to soften. The RBI’s rate cut comes at a time when global monetary tightening is easing, reducing the risk of imported inflation. 

Potential Downsides: Fixed Deposit Rates and Currency Weakness 

While borrowers celebrate lower EMIs, depositors may face declining fixed deposit (FD) rates. Banks, with lower borrowing costs, might not need to offer high interest rates on FDs to attract savings, impacting retirees and risk-averse investors relying on fixed-income returns. 

Additionally, a lower interest rate environment can make Indian assets less attractive to foreign investors, leading to potential capital outflows. The rupee has already been under pressure due to foreign investor exits, and further rate cuts could weaken the currency further. 

What’s Next? 

Economists anticipate further rate cuts in the range of 0.5%–1% in the coming quarters, particularly if growth remains sluggish. However, the RBI will likely take a cautious approach, ensuring inflation remains within its comfort zone while also supporting economic momentum. 

For now, the rate cut is a welcome move for consumers and businesses alike, offering relief amid global economic headwinds and domestic uncertainties.