Just six days after Union Budget 2025-26 was presented and nearly five years after its last such decision, the Monetary Policy Committee of the Reserve Bank of India (RBI) on February 7 cut the repo rate by 25 basis points taking it to 6.25%.
The move, under new RBI Governor Sanjay Malhotra, who chairs the MPC, comes amidst concerns of slowing growth and ebbing consumer demand that the Budget too tried to address with massive tax cuts for individual taxpayers. Together, these are expected to spark a virtuous cycle, providing taxpayers more disposable income and lower interest rates to make big-ticket purchases from cars to homes and consumer durables, which will then set the wheels of the economy in motion and get the private sector to invest to meet this demand.
The last time the MPC of the RBI cut rates was in early 2020, when it reduced the repo rate amidst the Covid-19 pandemic that had brought global economic activity to a near standstill.
This time around, too, the MPC’s decision comes at a time when “the global economic backdrop remains challenging” and it felt the need to prop up domestic growth. In fact, the RBI had been under pressure even as recently as November, when both Sitharaman and Commerce and Industries Minister Piyush Goyal had called for rate cuts to support economic growth.
While high inflation remains a concern—seen to average 4.4% in the fourth quarter of FY25 and 4.2% in FY26—subdued growth is seen as a bigger concern for now with the RBI pegging GDP expansion at an optimistic 6.7% in FY26. The MPC has also decided unanimously to continue with the neutral stance, but analysts say it is not sure of it will cut rates again in April but have not ruled it out either.
But what is clear is that fiscal and monetary policy have come together to propel the economy forward. Malhotra is hopeful that the repo rate cut will boost consumption and help economic growth. Sitharaman, too, expressed confidence of a sustained recovery in private investments.
“Orders for fast-moving consumer goods for the period April to June are already getting booked, and industry is clearly seeing the signs of a possible recovery of consumption. As a result, many of them are looking at reviewing their capacity utilisation itself, which means … that the triggers for a consumption-driven cycle are very clearly being felt by those who have to take the investment decisions,” Sitharaman said, addressing the media after attending the customary post-Budget meeting of the RBI’s central board.
The RBI’s rate cut is set to boost disposable incomes for taxpayers, as EMIs for home loans will decrease. Consider this: If one has a home loan of Rs 70 lakh at the current rate of 8.5% for a tenure of 20 years, the EMI will reduce by approximately Rs 1,191. Similarly, for a Rs 50 lakh loan, the reduction will be around Rs 794, and for a Rs 30 lakh loan, it will be Rs 476.
“The repo rate cut after two years is hugely welcome, and we congratulate Governor Malhotra on beginning his term with a bang. With the tax rate cuts earlier this month, the salaried and the middle class have received a double boost to tackle inflation and boost household savings,” says Adhil Shetty, CEO of bank services platform BankBazaar.
For instance, a salaried individual with a gross income of Rs 25 lakh and a home loan of Rs 50 lakh (20 years, at an interest rate of 9%, with 12 EMIs paid by March 2025) can expect to save a total of Rs 1.37 lakh in FY26-or Rs 11,461 per month. This is due to a combination of interest savings from the 25-bps home loan rate cut and tax savings from the revised tax slabs effective April 1, explains Shetty.
Currently, home loans are benchmarked against the Marginal Cost of Funds Based Lending Rate (MCLR) and the Repo-Linked Lending Rate (RLLR). In 2019, the RBI mandated that all banks link new loans to external benchmarks, as banks were not fully passing on rate cut benefits to borrowers. Existing borrowers, however, had the option to switch to external benchmarks or continue with the prevailing rates. It remains to be seen how quickly the latest rate cut translates into lower EMIs.
The real estate sector is expected to benefit from this dual push of fiscal and monetary policy. "It serves as a strong catalyst for the real estate sector, encouraging fence-sitting homebuyers to move forward with their purchase decisions. Given the RBI Governor’s assurance that all economic factors will be carefully considered to maintain balanced growth and stability, this cut could be helpful in sustaining economic momentum," says Aman Sarin, Director and CEO of real estate developer Anant Raj.
Though these measures may not have an immediate impact, the next few quarters could certainly bring some positive news.
@surabhi_prasad, @teena_kaushal