As on 7th February 2025, the Reserve Bank of India (RBI) announced a 25 basis point cut in repo rate to 6.25%. This has happened for the first time since the covid-induced rate cuts in 2019 and is presumed to have happened due to the rising GDP slump, low inflation and low urban consumption.
- This decision has been passed under RBI’s new governor Sanjay Malhotra
- The 0.25% reduction in repo rate is expected to consequently reduce the interest charged on home loans and other borrowings for investors.
- In 2019, banks had only passed 5 basis points(bps) cut as against the 25 bps rate cut.
What is the Repo Rate and Why Does It Matter?
Simply put, the repo rate is the interest rate at which the RBI lends money to commercial banks or the cost at which banks borrow money from the RBI. When the RBI increases the repo rate, borrowing becomes more expensive for banks, which leads them to raise interest rates on loans for individuals and businesses. On the other hand, when the RBI cuts the repo rate, banks can borrow at a lower cost, allowing them to reduce interest rates on home loans, personal loans, and business loans for the population.
The repo rate is a powerful tool used by the RBI to control inflation and manage economic growth. A lower repo rate boosts borrowing and spending, stimulating the economy, while a higher repo rate helps cool down inflation by reducing excess money flow. So, whether you're a borrower or an investor, changes in the repo rate can directly impact your loan EMIs, investment returns, and overall financial planning.
How Does the Repo Rate Cut Impact Home Loans?
Think of Mrs. R, who has a home loan of ₹50 lakhs with a floating interest rate of 9% for a tenure of 20 years. Her current EMI is around ₹44,986. After an RBI repo rate cut, her bank reduces the interest rate to 8.5%. This brings her EMI down to approximately ₹43,391—saving her around ₹1,595 every month, which adds up to nearly ₹3.6 lakh over the entire loan tenure.
With these monthly savings, Mrs. R could redirect her money towards starting a SIP in mutual funds, increasing her emergency fund, or even planning for a family vacation. Now, imagine thousands of borrowers like Mrs. R that could save and spend more. This increased financial activity is what helps boost the economy.
More Affordable Home Loans for New Borrowers
For new home loan borrowers, a repo rate cut is great news. Lower interest rates means one can secure a loan at more affordable rates right from the start. This not only makes homeownership more accessible but also allows one to either borrow a higher amount without significantly increasing their EMI or keep the loan amount the same and enjoy long-term savings. This affordability often encourages more people to invest in real estate, further stimulating economic growth.
Should You Consider Refinancing Your Home Loan?
A repo rate cut could be an opportunity for many to refinance their home loan, but whether it makes sense depends on a few factors.
For example, if you have a ₹50 lakh loan at 9% interest with 15 years remaining, refinancing to a new lender offering 8% could reduce your EMI from around ₹50,713 to ₹49,566—saving you nearly ₹1,147 every month and over ₹1.92 lakh across the loan tenure.
However, refinancing may not always be the best option. One must consider:
- Loan Tenure: If you're near the end of your loan term, then your savings might be minimal.
- Processing Fees & Charges: Lenders may charge processing fees, legal fees, or administrative costs, which could offset the savings.
- Rate Difference: A difference of at least 0.5% to 1% in interest rates usually makes refinancing worthwhile.
Always calculate the total savings against the costs involved before making a decision.
Impact of Repo Rate Cut on Personal, Car, Education Loans
While a repo rate cut directly affects home loans, it can also impact other types of loans like personal loans, car loans, education loans, and business loans. When the RBI reduces the repo rate, banks and financial institutions often lower their lending rates, making these loans more affordable.
For example, if someone has a personal loan of ₹10 lakh at an interest rate of 14%, a repo rate cut could reduce this rate to 13%. This might seem like a small change, but it can lower EMIs by ₹500–₹600 per month, saving thousands over the loan tenure.
- Personal Loans: Borrowers benefit from reduced EMIs, making it cheaper to manage expenses like weddings, travel, or emergencies.
- Car Loans: Lower interest rates encourage more people to finance vehicles, boosting the automobile sector.
- Education Loans: Students can borrow at lower rates, reducing the financial burden of higher education.
- Business Loans: Entrepreneurs and businesses get access to cheaper credit, helping them invest in growth and expansion.
Finance Stocks To Watch Out For Post the Repo Rate Cut 2025
The 2025 Repo rate cut by the RBI could significantly impact financial markets, particularly banking stocks and consumer goods stocks. With cheaper borrowing costs, banks may see an increased demand for loans, while consumers could have more disposable income, increasing spending towards essential and discretionary goods. Key sectors and stocks to track would include:
1. Banks: A lower repo rate implies that banks can now access funds at a reduced cost, potentially leading to lower lending rates for consumers and businesses. This can drive loan growth in sectors like home loans, personal loans, and business financing. This could impact leading banks like HDFC, Axis Bank, and SBI potentially boosting their revenue and profitability. However, the impact on their net interest margins (NIMs) will depend on how much of the rate cut is actually passed on to the borrowers.
2. Consumer Goods & FMCG: With reduced EMIs, consumers are likely to have additional disposable income which could lead to increased spending on packaged foods, hygiene products, and daily-use essentials. This could benefit FMCG giants such as ITC, Dabur, and HUL.
Should You Take a Loan or Invest More After a Repo Rate Cut?
After a repo rate cut, both borrowing and investing can become attractive options, but the right choice depends on your financial goals. A repo rate cut makes loans cheaper, lowering interest rates on home loans, personal loans, and business loans. This is a great time to borrow if you’ve been planning to buy a house, start a business, or make a big purchase. On the other hand, investment opportunities may also shift, especially in equity markets that tend to benefit from lower interest rates.
Pros of Taking a Loan After a Repo Rate Cut
- Lower Interest Rates: Reduced EMIs and overall interest costs, making loans more affordable.
- Higher Loan Eligibility: Lower rates can increase your loan eligibility, allowing you to borrow more.
- Ideal for Big Purchases: Great time for buying property, vehicles, or funding business expansion.
Cons of Taking a Loan After a Repo Rate Cut
- Long-Term Commitment: Even with lower EMIs, a loan is still a long-term financial obligation.
- Risk of Rate Fluctuations: Floating-rate loans could become costlier if rates rise in the future.
- Hidden Charges: Processing fees and other costs may reduce the overall benefit of lower rates.
Conclusion
The RBI’s repo rate cut brings with it both opportunities and risks for investors, home loan borrowers, and those tracking impacted sectors. If you have an existing home loan, evaluating refinancing options based on potential savings is crucial. For those planning new investments—whether in real estate or financial markets—understanding market movements and aligning decisions with long-term financial goals become very important.
Before taking any financial decision - calculate potential cost savings, measure returns against your goals and monitor market trends. A well-informed approach could help ensure that your decisions are strategic, sustainable, and aligned with your financial growth.
Disclaimer
This blog is for general/educational information purposes and is no way to be considered as advice, or recommendation for investment or otherwise.
Investment in securities market are subject to market risk, read all the documents carefully before investing. The securities quoted are exemplary and not to be considered as any kind of advice or recommendation. The past performance of the stocks are not necessarily indicative of future performance. INDmoney Private Limited 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500.
Sources: Investing.com, Investopedia