A few days after the income tax cut, there is more good news for the middle class. Their EMI burden will reduce as the RBI MPC has cut interest rates by 25 basis points (bps). New borrowers will also benefit as home loans, auto loans, and personal loans will soon become cheaper.
The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 6.25% on Friday. This is the first-rate cut by the RBI in five years, with the last one in May 2020. The repo rate is the interest rate at which the RBI lends money to other banks.
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First Interest Rate Cut Since COVID-19
This is the first time RBI has reduced interest rates since the COVID-19 pandemic (May 2020). From May 2020 to April 2022, RBI kept the repo rate unchanged at 4 percent. Then, starting in April 2022, it gradually increased the rate to 6.5 percent by February 2023. Since then, it remained unchanged for two years until now.
How Much Will You Save?
Let’s understand with an example. Suppose you have taken a home loan of Rs 50 lakh at an interest rate of 8.5 percent for 20 years. After a 25 basis points cut, the interest rate will reduce to 8.25 percent.
- Old EMI (at 8.5%): Rs 43,059
- New EMI (at 8.25%): Rs 42,452
- Total Savings: Rs 607 per month or Rs 7,284 per year
While this may not seem like a big amount, over a 20-30-year tenure, the savings add up significantly.
Impact on Personal Loan
If you have a personal loan of Rs 5 lakh at 12 percent interest for 5 years, the rate cut will reduce your EMI as follows:
- Old EMI (at 12%): Rs 11,282
- New EMI (at 11.75%): Rs 11,149
- Total Savings: Rs 133 per month or Rs 1,596 per year
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Impact on Car Loan
For a car loan of Rs 10 lakh at 9.5 percent interest for 7 years, the EMI will reduce as follows:
- Old EMI (at 9.5%): Rs 16,659
- New EMI (at 9.25%): Rs 16,507
- Total Savings: Rs 152 per month or Rs 1,824 per year