In a move that's likely to bring some relief to those with home loans, the Reserve Bank of India (RBI) has decided to trim key lending rates. This decision, the second in quick succession, signals a shift in the central bank's approach as it aims to balance economic growth with moderating inflation.
RBI's Decision and Rationale
The RBI's Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, concluded its recent meeting on Wednesday by announcing a 25-basis-point reduction in the repo rate. This brings the rate down to 6%. The repo rate is the interest rate at which the RBI lends money to commercial banks.
Governor Malhotra stated that this decision came after a "detailed assessment of the evolving macroeconomic and financial conditions and outlook." The MPC unanimously voted for this reduction. This follows a similar 25-basis-point cut in February. Notably, this is also the second major announcement by Malhotra since assuming his role in December 2024.
This rate cut is seen as a move to stimulate the economy. Inflation has recently dipped below 4%, but there are increasing concerns about a slowdown in economic growth. The RBI's action intends to boost demand and encourage investment.
In conjunction with the repo rate adjustment, the RBI also adjusted other rates. The standing deposit facility (SDF) rate is now 5.75%, and the marginal standing facility (MSF) rate stands at 6.25%.
Impact on Home Loan Borrowers
The RBI's decision is expected to have a positive effect on those with home loans. Since the repo rate influences the overall cost of borrowing in the economy, a decrease generally leads to lower costs for banks. These savings are often passed on to consumers in the form of reduced lending rates.
Specifically, because many home loans are now linked to external benchmarks, such as the RBI's repo rate, this reduction should translate to lower interest rates for borrowers, particularly those with floating-rate loans.
For those who already have loans, the impact will likely be seen from their loan's next reset date, which typically occurs quarterly or semi-annually. However, new borrowers may benefit more quickly, depending on how swiftly individual banks adjust their lending rates.
Shift in RBI Stance and Growth Forecast
In addition to the rate cut, the RBI has also shifted its policy stance from "neutral" to "accommodative." This indicates a more proactive approach to supporting economic growth. The RBI Governor noted that "the rapidly evolving situation requires continuous monitoring and assessment of the economic outlook."
However, the RBI has also revised its growth forecast for the financial year 2025-26. The MPC now projects growth at 6.5%, a 20-basis-point reduction from its earlier estimate of 6.7% in February.
The RBI's decision to lower the repo rate reflects its commitment to navigating the delicate balance between controlling inflation and promoting economic expansion. By making borrowing more affordable, the central bank hopes to stimulate demand and investment, even as it acknowledges the need for ongoing vigilance in a dynamic economic landscape.
