Home, other loans to become cheaper as RBI slashes rate after 5 years

PTI, MUMBAI, FEB 7, 2025 :  Home, auto, and other loans are likely to see a drop in interest rates after the Reserve Bank of India, under a new Governor, cut the key benchmark rate on Friday for the first time in almost five years to spur a sluggish economy.

The Monetary Policy Committee, headed by RBI Governor Sanjay Malhotra, slashed the repo rate by 25 basis points to 6.25 percent. This was the first reduction since May 2020 and the first revision after two-and-a-half years. Malhotra, a career bureaucrat who replaced Shaktikanta Das barely days after the last bi-monthly MPC meeting in December, said the Indian economy will grow at 6.7 percent in the fiscal starting April 2025, while the inflation rate will be lower at 4.2 percent.

The growth-inflation dynamics "opens up policy space for the MPC to support growth," he said, adding that the RBI will "remain unambiguously focused on a durable alignment of inflation with the target while supporting growth."

For the financial year ending March 31, the Reserve Bank quoted the government estimate to put the growth rate at 6.4 percent, its worst in four years and lower than the previously estimated 6.6 percent, while inflation was pegged at 4.8 percent.

While his predecessor held rates in waiting for inflation to drop to the four percent level, the RBI under Malhotra tilted towards supporting growth in the inflation-growth trade-off. While the policy rate was reduced, the MPC kept the stance unchanged at neutral. This could imply a more cautious approach towards the extent of rate cuts going forward in this rate-cutting cycle.

The repo rate (repurchase rate) is the interest rate at which the apex bank lends money to commercial banks when there is a shortage of funds. When the repo rate is high, borrowing costs for banks increase, which is often passed on to consumers in the form of higher interest rates on loans. Conversely, a lower repo rate usually results in lower interest rates on loans such as home loans, car loans, and personal loans. The repo rate also decides the returns on savings and investment products. A higher repo rate can lead to better returns on fixed deposits and other savings instruments, as banks offer higher interest rates to attract deposits. On the flip side, lower repo rates might reduce the interest earned on these savings products.

The MPC, which consists of three RBI and three external members, "decided unanimously to reduce the policy repo rate by 25 basis points from 6.50 percent to 6.25 percent," Malhotra said.

Explaining the rationale for the decision, he said inflation has declined. "Supported by a favorable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target (of 4 percent)."

The MPC also noted that though growth is expected to recover from the low of July-September 2024 (when it grew by 5.4 percent—its slowest expansion in nearly two years), it is much below last year's levels. "These growth-inflation dynamics open up policy space for the MPC to support growth while remaining focused on aligning inflation with the target," he said.

Following a peak in October, consumer price inflation eased to 5.22 percent in December and 5.48 percent in November. But it remains above the 4 percent target.