As RBI cuts repo rate again, will your home loan EMI go down? | Explainer

As the Reserve Bank of India (RBI) on Wednesday cut the repo rate again by 25 basis points, home loan EMIs are expected to fall. In the past two months, RBI has cut the repo by a total of 50 basis points.  In February, RBI cut the benchmark rate from 6.5 per cent to 6.25 per cent.

Therefore, the interest rates on home loans, which are linked to the MCLR and EBLR, stand to decline. Prior to October 1, 2019, floating-rate home loans were linked to the MCLR, i.e., marginal cost of lending rates. This means interest rates on home loans move upward or downward based on the marginal cost comprising deposit rates, repo rates, operating costs, and the cost of maintaining the cash reserve ratio (CRR).

With effect from October 1, 2019, floating-rate home loans are linked to external benchmarks, with the repo rate being the most common. Other benchmarks to which the floating-rate home loan can be linked are treasury bill yield and other benchmarks.

So, your home loan EMIs are likely to fall if one of the following happens:

I. Your home loan is linked to the external benchmark rate (specifically the repo rate).

II. Your home loan is linked to the marginal cost of lending rate (MCLR). 

Degree of fall

Although the banking regulator has cut the repo rate by a total of 50 basis points in the past two MPC meets, how much of this cut is passed on to the consumer is not clear. Banks can decide the degree to which this cut can be passed on to the consumer.  

However, even if banks do not pass on the entire benefit of 50 basis points, some of the benefits will likely be passed on.  

Other loans 

Meanwhile, all the other loans with fixed rates of interest, naturally, will not fall. These typically include personal loans, which are insulated from the repo rate movement. These are generally short-duration loans given at a fixed rate of interest.      

Experts believe the rate cut will lead to economic growth via greater transmission. 

"We expect the monetary policy to support greater transmission to help Economy grow in the current uncertain global environment. We expect market rates to remain well supported with 10-yr continue to trade in 6.40%-6.60% range, with positive bias. Short-term yields upto 1 year are also likely to trade in the current range after a sharp rally of 75-100 bps over the last one month," says Amit Somani, Deputy Head-Fixed Income, Tata Asset Management.

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