Banks prefer to lend more when the repo rate is lowered, which makes credit more available to businesses. Additionally, it expands the economy’s total money supply. In the end, this accelerates the economy’s growth rate.
For people who have taken out loans, particularly home loans, the Reserve Bank of India (RBI) has announced a 25 basis point reduction in the repo rate.

After October 1, 2019, all retail floating rate loans are based on the repo rate, an external benchmark. In such a scenario, banks are required to compel their clients to gain anytime the central bank lowers the repo rate.

Banks must reset interest rates quarterly in order to carry out this. Refinancing your house loan would be a smart way to benefit from the lower repo rate if it was taken out prior to October 1, 2019, and it is associated with the Marginal Cost of Funds Based Lending Rate (MCLR).

Interest rates on all loans associated with the repo rate decrease whenever it is lowered, resulting in lower interest payments for borrowers. Most banks do not drop your EMI when the RBI lowers the repo rate; instead, they provide you the advantage of a lower interest rate by shortening the loan’s term.

For Example, suppose a borrower has a home loan of Rs 75 lakh with a 20-year interest rate of 9%. After 36 months, the interest rate will drop to 8.75%.

The borrower would now pay interest of Rs 1.57 crore for 17 years rather than Rs 1.62 crore on the loan due to the interest rate reduction. As a result, the loan will be more than seven months sooner and Rs 4.97 lakh would be saved.

Notably, the borrower can save Rs 5.8 lakh (Rs 1.56 crore versus Rs 1.62 crore) in interest expenses and close the loan eight months sooner if the interest rate is lowered after 24 months.

Due to banks’ liquidity shortage, fierce competition for deposits, and the resulting high cost of funds, the RBI’s rate drop last week is anticipated to have a gradual impact on lending and deposit rates over several months.

The interest rate at which the RBI lends money to commercial banks is known as the repo rate. Since May 2020, this is the first repo rate reduction. In its unanimous ruling, the six-member MPC clarified that the repo rate was lowered to lower borrowing costs while promoting investment and consumption.

Since loan EMIs are anticipated to decrease in line with the RBI’s lending rates, the repo rate is anticipated to offer significant relief to borrowers.