RBI slashes interest rate to 6.25%, borrowers to benefit with lower EMIs

New Delhi (The Uttam Hindu): In a move to make loans more affordable, the Reserve Bank of India (RBI) has reduced the repo rate from 6.5% to 6.25%. This reduction comes after a 5-year gap with the last rate cut happening in May 2020. RBI Governor Sanjay Malhotra shared these decisions taken by the Monetary Policy Committee (MPC) at 10 am noting that this rate reduction would lead to cheaper loans and a decrease in EMI payments for borrowers.

Repo rate cut after five Years

The RBI's repo rate has been lowered for the first time in five years. The last time the repo rate was reduced was in May 2020, when it was cut by 0.40% to 4%. However, from May 2022 until May 2023 the RBI raised the repo rate by 2.50% to 6.5%. Now with this latest cut borrowers are likely to see a reduction in their EMIs providing much-needed relief.

How does the repo rate cut impact EMI and loan payments?

To understand the impact let’s take the example of Aditya who took a loan of Rs 30 lakh for 20 years at an interest rate of 9%. His EMI was Rs 26,992. Over the loan term he would pay Rs 34.78 lakh as interest totaling Rs 64.78 lakh for the Rs 30 lakh loan. However, after the RBI cut the repo rate by 0.25% banks also reduced the interest rates by 0.25%. As a result, Aditya's friend who takes the same Rs 30 lakh loan for 20 years but at an interest rate of 8.75% would pay a lower EMI of Rs 26,416—Rs 576 less than Aditya. Over the 20 years his total repayment would be Rs 63.39 lakh saving Rs 1.39 lakh compared to Aditya.

Will existing loan EMIs also decrease?

The effect of the repo rate reduction on existing loans depends on the type of loan. There are two types of loan interest rates:

- Fixed Interest Rate Loans : The interest rate on these loans remains the same from the start to the end, regardless of changes in the repo rate. Therefore, the EMI for fixed-rate loans remains unaffected by the repo rate change.

- Floating Interest Rate Loans : For loans with floating interest rates a reduction in the repo rate directly impacts the interest rate, leading to a lower EMI. Borrowers with floating-rate loans can expect their EMIs to decrease as a result of this rate cut.

Governor Sanjay Malhotra said-

''Except for a few occasions, inflation has remained close to our target. He said that food inflation is expected to soften with the arrival of new crops. At the same time, he said that there are many challenges in the global economy, global growth is also below average.''

Policy Rate as a Tool to Tackle Inflation

The policy rate, such as the repo rate, is a key tool used by central banks to control inflation. When inflation is high, the central bank raises the policy rate to reduce the money flow in the economy, making loans more expensive. This reduces demand and helps bring inflation down. Conversely, when the economy is struggling, the central bank reduces the policy rate to make borrowing cheaper and stimulate economic activity.

Inflation Figures and their impact

Inflation plays a significant role in determining the purchasing power of money. As of December, retail inflation fell to a 4-month low of 5.22%, primarily due to cheaper food items. In contrast, wholesale inflation rose to 3.36%, driven by rising prices of potatoes, onions, eggs, meat, fish and fruits.

Inflation directly affects the value of money. For example if the inflation rate is 7%, the value of Rs 100 would effectively be reduced to Rs 93. This highlights the importance of investing and managing finances to counteract the effects of inflation.

Conclusion: A step toward economic recovery

The RBI's decision to cut the repo rate marks a significant step in supporting economic recovery and managing inflation. With reduced EMIs and cheaper loans borrowers stand to benefit while the central bank aims to keep inflation in check. As the global economy continues to face challenges these monetary measures could provide the necessary relief and stability to help the country recover.

RBI's repo rate cut and its broader impact on borrowers and inflation serves as a reminder of how central banks use policy tools to manage the economy and protect the purchasing power of citizens.