RBI MPC Meeting: Newly appointed RBI Governor Sanjay Malhotra is chairing his first Monetary Policy Committee (MPC) meeting starting Wednesday. The interest rate decision will be announced on Friday.
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Great news for borrowers! The Reserve Bank of India (RBI) is likely to cut interest rates by 25 basis points (0.25%) this Friday, after holding rates steady for two years. This move is expected to provide some much-needed relief for your Equated Monthly Installments (EMIs) on loans like home loans, personal loans, and car loans. But how much will you actually save? Let’s break it down.
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Newly appointed RBI Governor Sanjay Malhotra is chairing his first Monetary Policy Committee (MPC) meeting starting Wednesday. The interest rate decision will be announced on Friday.
Why Is This Happening?
The RBI’s decision comes in the wake of the Union Budget’s push to stimulate consumption-led growth, alongside improving market liquidity. Retail inflation has also remained under control, staying within the RBI’s comfort zone of 6 per cent, allowing the central bank room to act without worrying about runaway prices.
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The Reserve Bank of India (RBI) has kept the repo rate (short-term lending rate) unchanged at 6.5 per cent since February 2023. The last time the RBI had reduced the rate was during the Covid times (May 2020) and thereafter, it was gradually raised to 6.5 per cent.
Now, with consumption still sluggish, especially in a post-pandemic world, the RBI is looking to boost growth by making borrowing cheaper. This could mean lower EMIs, easing the financial burden for many households.
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How Much Will You Save?
Let’s look at an example. Say you have a home loan of Rs 50 lakh at an interest rate of 8.5% for a tenure of 20 years. With the 25 basis points rate cut, your interest rate would drop to 8.25%. Here’s how that impacts your monthly EMI:
- Old EMI (at 8.5%): Rs 43,059
- New EMI (at 8.25%): Rs 42,452
So, you save about Rs 607 every month. Over the course of a year, that’s a savings of Rs 7,284!
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This might not seem like a huge amount for some, but for many borrowers, every bit helps, especially when you factor in the long-term benefits over a 20- or 30-year loan term. This will also be reduced in the subsequent RBI MPC policy meetings.
Caveat: This is just a rough estimate. The final EMI savings will be known only after your bank takes a decision on EMI loan rate cuts. You loan interest rate comprises two things — MCLR and spread. Though MCLR will be reduced after the repo rate cut by the RBI, the spread depends upon banks. It depends upon the quantum of interest rate cut transmission to customers.
Also, for existing borrowers, only those who took loan on floating interest rates will be benefitted by the rate cuts. However, for those who took loan on fixed interest rates, their EMIs will remain the same.
Personal Loan Example:
Let’s say you have a personal loan of Rs 5 lakh at an interest rate of 12% for a tenure of 5 years. With the 0.25% rate cut, your EMI would go down from:
- Old EMI (at 12%): Rs 11,282
- New EMI (at 11.75%): Rs 11,149
This would save you Rs 133 a month, or Rs 1,596 a year.
Car Loan Example:
For those with a car loan of Rs 10 lakh at an interest rate of 9.5% for a 7-year term, a 25-basis point reduction would bring down your EMI from:
- Old EMI (at 9.5%): Rs 16,659
- New EMI (at 9.25%): Rs 16,507
This translates to a Rs 152 saving per month, or Rs 1,824 annually.
What’s Next?
The RBI will officially announce the rate cut on Friday (February 7, 2025), and though the rate cut has been widely anticipated, the key focus will also be on the RBI’s future outlook. With the rupee recently hitting a record low against the dollar, it’s crucial to see if the RBI will change its stance on liquidity or provide any guidance on managing currency depreciation.
In any case, this rate cut is a step toward boosting consumer spending and lending.
The RBI’s 25-basis point rate cut could mean a monthly saving on your EMI. While it may not drastically change your finances overnight, over time, this small adjustment can add up. Plus, with the RBI likely to maintain this dovish stance for the foreseeable future, you could be looking at even more opportunities to save in the coming months.
