Borrowers may soon benefit from lower Equated Monthly Instalments (EMIs) as the Reserve Bank of India’s Monetary Policy Committee (MPC) is expected to reduce the repo rate for the first time in nearly five years. The policy decision, to be announced on February 7, will be the first under the newly-appointed RBI Governor Sanjay Malhotra.
If implemented, the anticipated 25 basis points (bps) cut would mark a shift from the central bank’s two-year stance of maintaining stable rates. This move is driven by easing inflation and the government’s pro-growth measures, including tax relief under the new regime introduced in the latest Union Budget 2025.
Rate Cut
The repo rate, which determines the cost at which commercial banks borrow from the RBI, directly influences lending rates. A reduction in the repo rate typically translates to lower borrowing costs, potentially benefiting both retail and corporate borrowers.
Market expectations for a rate cut gained traction following the government’s announcement of income tax relief on income up to ₹12 lakh, aimed at boosting consumption. Inflation has been on a downward trend, with Consumer Price Index (CPI) inflation easing from 6.2% in October 2024 to 5.2% in December 2024. If inflation remains within the RBI’s comfort zone, further rate cuts may be on the horizon.
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Multiple Rate Cuts Possible
A report by SBI Research projects that the RBI could lower the policy rate by a cumulative 75 bps during the easing cycle. The February cut is expected to be followed by another reduction in April 2025. While the RBI may pause in June to assess inflationary pressures, further cuts could resume from October 2025. The SBI report estimates inflation will moderate to 4.5% in Q4 FY25 and average 4.8% for the fiscal year. This supports the case for a gradual monetary policy easing.
Impact on Borrowers
A repo rate cut would provide relief to borrowers, especially those with floating-rate home loans, personal loans, and business loans. However, the extent to which banks pass on the benefit depends on factors such as credit demand, deposit growth, and overall liquidity conditions.
Adhil Shetty, CEO of Bankbazaar.com, says, “Although a 25-basis point rate cut is largely expected,
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