The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points to 6.25% in its monetary policy meeting on February 7, 2025, marking the first rate cut in nearly five years.
This move brings much-needed relief to home loan borrowers, who have only seen interest rates either rise or remain stagnant over the past few years. With this decision, banks and financial institutions are expected to lower their lending rates, making home loans more affordable.
According to Adhil Shetty, CEO of Bankbazaar.com, if you have a 20-year home loan at an interest rate of 8.75% and have already paid 12 EMIs by March, the 25 bps rate cut effective from April will result in interest savings of ₹8,417 per lakh. On a ₹50 lakh loan, this amounts to savings of ₹4.20 lakh over the loan tenure, with 10 EMIs being reduced, assuming all other parameters remain constant. BankBazaar suggests that borrowers with strong credit scores explore more aggressive payment options, such as refinancing to a rate that is 50 bps or lower. For example, refinancing to an 8.25% rate while keeping the EMI constant could lead to per-lakh savings of ₹14,480 over the remaining loan tenure, translating to nearly 15% savings per lakh—a substantial benefit. Additionally, if the rate cut takes effect from April 1, borrowers can expect per-lakh interest savings of ₹3,002 for the remainder of the year. On a ₹50 lakh loan, this means savings of ₹1.50 lakh in the second year alone.Combining Tax Savings with Loan Benefits When these savings are viewed alongside the income tax exemptions introduced in the Union Budget 2025, the financial benefits become even more pronounced. Under the new tax regime, individuals with taxable income up to ₹12 lakh are exempt from paying taxes. For someone earning a gross salary of ₹25 lakh, the tax savings could amount to ₹1.14 lakh annually. Combined with the ₹1.50 lakh interest savings on a ₹50 lakh home loan, the total savings for the year would be ₹2.64 lakh, or approximately ₹22,000 per month.What Should Fixed Deposit Investors Do Now? While the repo rate cut is good news for borrowers, fixed deposit (FD) investors may need to reassess their strategies. With interest rates likely to decline further, FD returns could shrink in the coming months. Here’s what FD investors can consider:1. Lock in Current Rates If you’re planning to open a new FD, consider doing so soon to lock in the current higher interest rates before banks adjust them downward.
2. Explore Alternative Investments With FD returns potentially decreasing, investors may want to explore other investment options such as debt mutual funds, corporate bonds, or even equity-linked savings schemes (ELSS) for better returns, depending on their risk appetite.3. Ladder Your FDs To mitigate the impact of falling interest rates, consider creating an FD ladder by splitting your investment into multiple FDs with varying tenures. This strategy ensures that you can reinvest at potentially higher rates in the future.
4. Review Existing FDs If you have existing FDs, check if they offer a premature withdrawal option. If the penalty for breaking the FD is low, you might consider reinvesting in higher-yielding instruments.
The Union Budget 2025 has introduced significant tax relief for the middle class, with taxable income up to ₹12 lakh being exempt from taxes under the new regime. This move, combined with the RBI’s rate cut, provides a dual advantage for salaried individuals, enabling them to save more and invest in their future.