Lower Lending Rates Make Borrowing More Affordable – Here’s How
In a significant move, the Reserve Bank of India (RBI) has announced a 25-basis-point cut in the repo rate, bringing it down to 6.25%. This marks the first revision in nearly five years, with the last reduction occurring in May 2020.
During the announcement, RBI Governor Sanjay Malhotra highlighted that while the Indian economy remains resilient, it is not entirely insulated from global challenges. He emphasized the importance of stakeholder consultations and reaffirmed the commitment to strengthening the prudential framework. Additionally, he noted that average inflation has remained lower since the implementation of the monetary policy framework.
Impact on Home Loans
The repo rate directly influences lending rates, particularly home loans. When the RBI reduces the repo rate, banks typically follow suit by lowering their lending rates, making loans more affordable. This impacts both fixed and floating interest rate loans, with floating-rate borrowers experiencing benefits either immediately or at their next reset period.
What Borrowers Should Know
Since April 2019, banks have been required to link their home loan interest rates to the External Benchmark Lending Rate (EBLR). This linkage ensures that floating-rate loans respond more directly to changes in monetary policy. As a result, both new and existing borrowers stand to benefit, especially when interest rates decrease.
Action Points for Borrowers
- Monitor RBI’s bi-monthly policy meetings for rate updates.
- Contact banks when repo rates drop to check for adjustments.
- Consider rate negotiation or refinancing, particularly for floating-rate loans.
Important Considerations
- EMI reductions follow repo rate cuts, but the timing varies.
- Banks differ in how quickly they implement rate changes.
- Even small rate cuts can lead to significant long-term savings on home loans.
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