RBI Repo Rate Cut Explained: After nearly five years, RBI has cut the repo rate by 25 basis points (bps), bringing it down from 6.50% to 6.25%.and that means cheaper loans, lower EMIs, and… wait for it… mixed reactions from the market!
But why did the RBI decide to do this now? And how does it impact different sectors of the economy?
Let’s break it down in the simplest way possible.
Why Did RBI Cut the Repo Rate?
The Monetary Policy Committee (MPC), which decides on interest rates in India, has been monitoring the economy closely. Based on their analysis, they decided to have a rate cut but why now?
The economy is slowing down (estimated 6.4% GDP growth for FY25, slowest in 4 years), and inflation is playing nice (CPI at 4.2% for FY26, within the RBI’s comfort zone). Lower interest rates encourage borrowing and investment.
The RBI is trying to balance economic growth with inflation control. This move is expected to make borrowing cheaper, encourage investment, and boost overall economic demand.
Who Benefits from the RBI Repo Rate Cut?
This repo rate cut will have different effects on different sectors and individuals. Let’s look at who gains the most from this decision:
- Home & Auto Loan Borrowers:-
If you have a home loan or a car loan, this is good news for you! Banks will likely pass on the benefits of lower borrowing costs to customers, reducing the interest rate on loans. This means lower EMIs (monthly pay Real Estate Sector
Since home loans are becoming cheaper, more people might be encouraged to buy houses. This will increase demand in the real estate market, which has been struggling in recent years.
- NBFCs & Small Finance Banks:-
Non-Banking Financial Companies (NBFCs) and small banks rely heavily on borrowing from the RBI and other financial institutions. Lower interest rates mean they can borrow at cheaper rates and lend more easily to businesses and individuals.
- Industries Dependent on Credit:-
Sectors like automobiles, infrastructure, and manufacturing depend on large loans to expand their operations. A lower interest rate will reduce their financial burden and allow them to grow faster.
Who Might Face Challenges?
While lower interest rates benefit borrowers, they can pose challenges for some:
- Fixed Deposit (FD) Holders:
If you have a fixed deposit in a bank, you might see a reduction in interest rates. Banks adjust FD rates based on the repo rate, so lower rates mean your savings might earn less interest than before.
- Bond Market Investors:
Government bonds and other fixed-income securities are directly affected by changes in interest rates. The 10-year bond yield increased by 5 bps, indicating that investors have mixed reactions to this rate cut.
- Foreign Institutional Investors (FIIs):
FIIs looking for new bond investments might find them less attractive since fresh issuances will carry lower interest rates due to the repo rate cut. Moreover, if US bond yields rise (due to Fed rate hikes), FIIs might shift investments to safer US Treasuries, which would offer better risk-adjusted returns. Additionally, the Indian Rupee’s depreciation could reduce FIIs’ returns when converted back into foreign currency, making Indian bonds less appealing.
Impact on Banks – Who Gains the Most?
Banks with More Fixed-Rate Loans
Fixed-rate loans don’t change with repo rate fluctuations, so banks that have more of these loans will benefit as their borrowing costs reduce while their loan interest remains the same. The top banks in this category are:
- Bandhan Bank (77%)
- AU Small Finance Bank (70%)
- IDFC First Bank (61%)
Banks with High Loan-to-Deposit Ratios (LDR)
If a bank collects ₹100 in deposits and lends ₹90, its LDR is 90%, meaning it has given out most of its funds with little left in reserve. When the RBI cuts the repo rate, these banks benefit as they can borrow cheaply from the RBI to continue lending without liquidity concerns, strengthening their lending position.
The top banks in this category are:
- HDFC Bank (98%)
- Axis Bank (93%)
- IDFC First Bank (94%)
Banks with Strong Liquidity
A bank that collects ₹100 in deposits but lends only ₹75, keeping ₹25 in reserve, has a low LDR meaning it holds more funds instead of lending everything. With a repo rate cut, these banks don’t rely much on RBI borrowing but gain the flexibility to expand lending at lower interest rates. Some of the banks in this category are:
SBI (77% LDR)
Indian Bank (90% LDR)
How Much Will You Save on Loans?
Let’s take a simple example
If you have a ₹50 lakh home loan at 8.5% interest for 20 years, here’s how the repo rate cut will affect your EMI:
Lower EMI Option:
Old EMI: ₹43,391
New EMI: ₹42,600
Savings: ₹2,791 per month (₹1.9 lakh over the loan tenure)
Shorter Tenure Option:
Keep EMI the same but reduce loan tenure by 10-12 months
Total savings: ₹3.5 lakh
This means you either pay a lower EMI every month or repay your loan faster, reducing your total interest payments.
Market Reaction
- Banking and real estate stocks showed positive movement.
- The bond market reaction was mixed – the 10-year yield rose by 5 bps.
- The stock market remained neutral since this rate cut was widely expected.
The big question now is: Will the RBI cut the repo rate again in the future?
Many analysts believe that another rate cut could happen in April, but it will depend on:
- Global inflation trends
- Crude oil prices
- Domestic economic growth
Final Takeaway
This repo rate cut is a big deal for the economy. It makes borrowing cheaper, encourages spending and investment, and supports economic growth. While it benefits loan borrowers and businesses, it could pose challenges for fixed deposit holders and some investors.
If you have any loans, keep an eye on how banks adjust their interest rates. It could be a great opportunity to reduce your EMIs or pay off your loans faster!
FAQs
The repo rate is the interest rate at which the RBI lends money to banks. A cut in the repo rate makes borrowing cheaper, encouraging economic growth.
A lower repo rate means banks can offer loans at reduced interest rates, making home, car, and business loans more affordable.
A repo rate cut often leads to lower interest rates on FDs, reducing returns for depositors.
A repo rate cut makes existing bonds with higher interest rates more valuable, increasing their prices in the market.
Banks with high loan-to-deposit ratios (LDRs) benefit the most as they can borrow at lower costs, while banks with strong liquidity may see a limited impact.
A lower repo rate boosts stock and bond markets, but investors should analyze market trends before making decisions.
6 Responses
Impressive deep research and analysis…
Nice blog
Excellent information 👍
Informative
Informative
So knowledgeable information. Thanks to Insights.