RBI Lowers Repo Rate, Paving the Way for Record Low Home Loan Rates

The Reserve Bank of India (RBI) has made a significant move by cutting the repo rate for the first time since June 2025, reducing it by 25 basis points to 5.25%. This decision is anticipated to lead to lower home loan rates, potentially reaching record lows. Additionally, the RBI has revised its growth projection for the fiscal year 2026 upward to 7.3%, while also sharply lowering its inflation estimates, highlighting the resilience of the Indian economy amid global challenges.

Impact on Home Loan Rates

The recent repo rate cut is expected to have a swift effect on credit markets, particularly in the housing sector. With the new rate, home loan rates could drop to levels not seen since the pandemic, with several state-owned banks currently offering loans at 7.35%. This reduction could bring rates down to approximately 7.1%. For borrowers taking a loan of ₹1 crore over 15 years, this change translates to a monthly repayment decrease of about ₹1,440. However, for banks to offer these lower rates, they may need to significantly reduce deposit rates or widen their spreads, which could create disparities between new borrowers and those who secured loans at higher rates recently.

RBI’s Economic Outlook

RBI Governor Sanjay Malhotra expressed confidence in the Indian economy’s resilience, stating that it is well-positioned for robust growth despite external challenges. The RBI has projected a GDP growth of 7% for the third quarter and 6.5% for the fourth quarter of the current fiscal year, with an overall growth forecast of 6.7% for the next fiscal year. The economy expanded by 8.2% in the second quarter, following a 7.8% growth in the first quarter. Malhotra attributed this growth to factors such as GST cuts and favorable monsoon conditions, which have bolstered domestic demand.

Inflation and Monetary Policy Adjustments

In a notable adjustment, the RBI has lowered its retail inflation projection for 2025-26 from 2.6% to 2%. This revision is largely due to a moderation in food prices. The RBI noted that inflationary pressures appear to be easing, especially when excluding the significant contributions from precious metals in recent data. The recent rate cut comes at a time when the Indian rupee has weakened against the dollar, but the RBI’s substantial reserve stockpile of $686 billion provides a buffer for policymakers. Despite challenges such as foreign institutional investor withdrawals and weak merchandise exports, the external sector remains stable, supported by strong services exports and remittances.

Challenges for Lenders and Future Prospects

While the rate cut is expected to benefit borrowers, it presents challenges for lenders. Lower lending rates could compress banks’ margins unless their funding costs decrease. Non-banking financial companies (NBFCs) are likely to see quicker benefits from the rate cut due to faster adjustments in their borrowing costs. Umesh Revankar from Shriram Finance described the policy as a significant enabler, emphasizing that the RBI’s neutral stance and large-scale open-market purchases will facilitate quicker transmission to sectors reliant on last-mile finance, such as rural entrepreneurs and micro, small, and medium enterprises (MSMEs). However, banks are currently focusing on higher-yield credit to mitigate margin pressures, leading to a preference for secured assets like gold and auto loans while curbing unsecured personal lending.

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