Good news for home loan borrowers. The Reserve Bank of India (RBI) just slashed its repo rate by another 25 basis points. Add in the 100 basis points (1 per cent) cut in the benchmark rate at which it lends money to commercial banks, through 2025, and the repo rate has come down from 6.50 per cent to 5.25 per cent. Borrowers who have a floating rate home loan linked to an external benchmark like the repo, then you should see a cut in their interest rates quickly.
How do the interest rate reductions by the RBI affect your EMIs? If you had availed a Rs 50 lakh home loan at a 9 per cent rate of interest for a period of 20 years, your monthly EMI would have been Rs 44,986 at the start of the year. Your overall interest outgo over the loan period would have been over Rs 57.96 lakh.
The earlier 100bps cuts would have lowered your EMIs to Rs 41,822 and the overall interest amount to Rs 50.37 lakh. With the additional 25bps cut in the repo rate on Friday, the EMI will further come down to Rs 41,047, and the interest outgo will reduce to a little over Rs 48.51 lakh.
According to RBI’s statistics, the weighted average lending rate of outstanding rupee loans has moderated by 63bps so far. On the deposit side, the weighted average domestic term deposit rate on fresh deposits has declined by 105bps, while that on outstanding deposits has softened by 32bps over the same period.
Why has the RBI reduced the repo rate again?
One major comforting factor the Reserve Bank had was the extremely low inflation. Amid lower food prices as well as the GST (Goods and Services Tax) rates cut in September, the October CPI (consumer price index) inflation came in at a record low of 0.25 per cent.
RBI Governor Sanjay Malhotra pointed out that for the first time since the adoption of the flexible inflation targeting framework, average headline inflation for a quarter at 1.7 per cent in July-September, breached the lower tolerance threshold of 2 per cent of the 4 per cent inflation target.
At the same time, GDP growth has been strong. In the September quarter, real GDP growth surged 8.2 per cent, which is being supported by the GST cuts and strong spending in the festive season.
As Malhotra noted, the benign inflation at 2.2 per cent and growth at 8 per cent in the first half of the current financial year presented a “rare goldilocks period.”
The MPC decision to cut the repo rate was unanimous, and it also decided to continue with its “neutral” policy stance.
Outlook
The MPC noted that the headline inflation had eased significantly and was likely to be softer than the earlier projections, primarily on account of “exceptionally benign” food prices. On the other hand, growth while remaining resilient is expected to somewhat soften.
“Both headline and core inflation are expected to be at or below the 4 per cent target during the first half of 2026-27. The growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” said Malhotra.
The MPC has now lowered its CPI inflation forecast for the full year ending March 2026 to 2 per cent from 2.6 per cent it had projected in the previous meeting in October. Inflation in the December quarter is seen at 0.6 per cent, and is then expected to rise to 2.9 per cent in the January-March quarter. CPI inflation in the first two quarters of the next financial year is seen at 3.9 per cent and 4.0 per cent, respectively.
While lowering CPI inflation, the RBI MPC has also raised its GDP growth expectations for the 2025-26 financial year to 7.3 per cent from 6.8 per cent it had projected in October. Growth in the December quarter is seen at 7 per cent and in the March quarter at 6.5 per cent. Real GDP growth in the first two quarters of the 2026-27 financial year is estimated at 6.7 per cent and 6.8 per cent, respectively.
“Domestic factors such as healthy agricultural prospects, continued impact of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions and congenial monetary and financial conditions should continue to support economic activity. Continuing reform initiatives would further facilitate growth,” said Malhotra.
At the same time, he pointed out that external uncertainties continued to pose downside risks to the outlook, while any speedy conclusion of various ongoing trade and investment negotiations would present upside potential.
India’s rupee has continued to depreciate in 2025 and earlier this week slipped past the psychological 90 to the US dollar mark. This has been largely driven by continued sell-off by foreign institutional investors, 50 per cent import tariffs imposed by the US administration, which puts Indian goods exports at a disadvantage and the uncertainty around when the two countries will sign a bilateral trade deal and if it will favour India.
Malhotra noted that foreign portfolio investment (FPI) to India recorded net outflows of $0.7 billion between April and December 3, due to outflows in the equity segment. Flows under external commercial borrowings and non-resident deposit accounts also moderated as compared to last year.
However, India’s foreign exchange reserves have remained strong. Malhotra pointed out that as of November 28, the forex reserves stood at $686.2 billion, providing an import cover of more than 11 months.
System liquidity as measured by the net position under the Liquidity Adjustment Facility stood at an average surplus of Rs 1.5 lakh crore since the MPC last met in October, according to Malhotra.
The RBI will conduct open market operation (OMO) purchases of government securities amounting to Rs 1 lakh crore and 3-year US dollar-rupee buy-sell swaps of USD 5 billion this month. These measures will ensure adequate, durable liquidity in the system and further facilitate monetary transmission, he noted.