Does RBI’s Repo Rate Change Affect Your Home Loan Interest Rate?

On April 9, 2025, the Reserve Bank of India (RBI) took a decisive step to stimulate economic growth by cutting the repo rate by 25 basis points, bringing it down to 6%. This move, driven by slow economic growth and US Government's imposition of 26% tariff on imports, is expected to have far-reaching effects on the housing market. This is the second time the RBI has cut the repo rate - the first rate cut happening in February 2025. 

While borrowers may rejoice at the prospect of lower home loan interest rates, the real question is: how soon will banks pass on the benefits, and what does this mean for prospective homebuyers and existing homeowners? Let’s take a deeper look at the implications of this rate cut.

Understanding the Repo Rate and Its Influence on Home Loans

The repo rate is the rate at which the RBI lends money to commercial banks. When this rate is reduced, banks can borrow funds at a lower cost, which often leads to reduced interest rates on loans, including home loans. However, the extent and timing of this transmission vary based on a range of factors, including liquidity conditions, banks’ financial health, and credit demand.

How Will the Repo Rate Cut Impact Home Loan Borrowers?

1. Lower Interest Rates on New Home Loans

Banks and housing finance companies (HFCs) are likely to pass on the benefit of the reduced repo rate to borrowers, but the transmission of rate cuts is rarely immediate. Some banks may lower their lending rates within weeks, while others may take months, especially if they are MCLR-linked loans. This means potential homebuyers must stay vigilant and compare interest rates across lenders before taking out a home loan.

2. Reduced EMIs for Existing Floating-Rate Borrowers

For those with home loans linked to an external benchmark rate (like the RBI’s repo rate), their EMIs could decrease. For example, if the home loan interest rate drops from 8.75% to 8.50%, the EMI on a ₹50 lakh loan over 20 years will reduce from ₹44,186 to ₹43,391. However, the pace at which lenders reflect the reduction varies, and not all borrowers may see an immediate change in their monthly payments.

3. Impact on Fixed-Rate Home Loans

Fixed-rate home loans remain unaffected by repo rate fluctuations. Borrowers locked into fixed-rate contracts will not experience immediate relief, but those considering refinancing may find it an opportune time to explore lower rates.

The Real Impact: Will Banks Pass on the Benefit?

Historically, banks have been slow to pass on the benefits of repo rate cuts to customers. While the RBI has mandated external benchmark-linked lending rates (EBLRs) to improve transparency, banks often adjust their loan pricing strategies based on their own funding costs and business goals. Therefore, while rate cuts are beneficial, borrowers should closely monitor their lenders’ announcements and explore refinancing options when necessary.

Should You Consider Refinancing Your Home Loan?

With interest rates trending downward, refinancing—or balance transfer of home loans—can be an effective strategy for cost savings. Borrowers with existing loans at higher rates can approach other lenders offering competitive rates. However, refinancing comes with additional costs such as processing fees and administrative charges, so it’s important to evaluate the overall savings before making a switch.