Home loan borrowers can rejoice. The Reserve Bank of India’s monetary policy committee on Friday delivered an outsized 50 basis points (0.50 per cent) cut in the repo rate, as it sees inflation remaining benign while growth concerns remain, especially given the geopolitical and trade-related uncertainties.
Add in the 25 bps cut announced earlier in February and another 25 bps cut in April, the benchmark rate at which the RBI lends money to commercial banks has now declined to 5.50 per cent from 6.50 per cent.
Furthermore, to ensure effective interest rate transmission in the banking system, the central bank will also reduce its cash reserve ratio by 100 bps over four tranches of 2 bps, which should ensure ample liquidity in the system and drive faster transmission of rates.
How will this interest rate cut impact you? If you had a ₹50 lakh loan for a 20-year period and were paying an 8.5 per cent rate of interest, your monthly EMI (equated monthly instalment) would have been around ₹43,391 per month. A 50 bps reduction in interest rate will bring the EMI down to ₹41,822, which is a good ₹1,569 lower per month or ₹18,828 per year.
Do note that loans that are linked to external benchmark rates like the Repo will see a faster rate transmission, compared with loans that are linked to earlier MCLR (marginal cost of funds-based lending rate), where the rate cut will be based on a bank’s asset, liability position.
Most economists had expected that the RBI MPC would deliver a rate cut for the third consecutive time, but few expected a 50bps cut. The rationale behind the outsized rate cut was that inflation is expected to remain below RBI’s 4 per cent target, but growth concerns remain, especially given the geopolitical tensions and trade tariff-related uncertainties.
“Inflation has softened significantly over the last six months from above the tolerance band in October 2024 to well below the target with signs of a broad-based moderation. The near-term and medium-term outlook now gives us the confidence of not only a durable alignment of headline inflation with the target of 4 per cent, but it is likely to undershoot the target at the margin,” said RBI Governor Sanjay Malhotra.
But, he also stressed that growth remained lower than what was aspired amid a challenging global environment and heightened uncertainty.
“Thus, it is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum. This changed growth-inflation dynamics calls for not only continuing with the policy easing but also front-loading the rate cuts to support growth,” said Malhotra.
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The Reserve Bank has lowered its full-year 2025-2026 CPI (consumer price index) inflation forecast to 3.7 per cent from 4.0 per cent. On the other hand, it has retained real GDP growth forecast for the current financial year ending March 2026 at 6.5 per cent.
“The outlook for the agriculture sector and rural demand is expected to receive further impetus by the expected above-normal southwest monsoon rainfall. On the other hand, sustained buoyancy in service activity should nurture a revival in urban consumption. Trade policy uncertainty, however, continues to weigh on merchandise export prospects, while the conclusion of a free trade agreement with the United Kingdom and progress with other countries should provide a fillip to trade in goods and services. Spillovers emanating from protracted geopolitical tensions and global trade and weather-related uncertainties pose downside risks to growth,” said Malhotra.
But, even as the RBI delivered a bigger rate cut, it changed its monetary policy stance to “neutral” from “accommodative” and clearly indicated there was limited room for rate cuts ahead, given the 100 bps cuts it has announced thus far.
“From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance,” Malhotra pointed.
The RBI’s decision to reduce the repo rate by 50 bps underscores a clear commitment to supporting growth, said Yashish Dahiya, chairman and group CEO of PB Fintech.
“Coupled with the shift to a neutral stance, it signals a more balanced and measured approach going forward. This move will ease borrowing costs and enhance liquidity, benefiting MSMEs and retail loan borrowers,” said Dahiya.
Cash reserve ratio cut
Malhotra stressed on Friday that the central bank was committed to providing sufficient liquidity to the banking system. The RBI will cut the cash reserve ratio (CRR) by 100 basis points to 3 per cent of net demand and time liabilities in a staggered manner. The CRR cut will be implemented in four equal tranches of 25 basis points each with effect from the fortnights beginning September 6, October 4, November 1 and November 29.
According to Malhotra, the CRR cut would release primary liquidity of about ₹2.5 lakh crore to the banking system by December 2025.
CRR is the percentage of a bank’s total deposits that need to be maintained with the Reserve Bank in cash.
“Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market,” said Malhotra.
The 100bps CRR cut is a positive step as it encourages banks to lend more freely, pointed Divam Sharma, founder and fund manager at Green Portfolio PMS.
