RBI Cuts Repo Rate by 25 BPS: How It Will Impact Your Auto Loan?

The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points (bps), bringing it down from 6.5% to 6.25%. This move, announced on Friday (February 7, 2025), is likely to make loans, including home and auto loans, more affordable. Borrowers with loans linked to the repo rate are expected to benefit, as banks typically pass on such rate cuts to customers.

The last time the RBI cut the repo rate was in May 2020, when it reduced the rate to 4% to help the economy recover from the COVID-19 pandemic. As economic activity picked up, the RBI began raising rates in May 2022, eventually peaking at 6.5% in February 2023. Since then, the rates remained unchanged, as the central bank prioritised balancing inflation control with economic growth.

With inflation showing signs of easing and GDP growth slowing to a four-year low, the rate cut was widely anticipated. The reduction aims to stimulate economic activity by reducing borrowing costs for businesses and individuals.

Impact on Loan holders

Borrowers with floating interest rate loans will benefit the most from the repo rate cut. Most banks link their loans to an external benchmark rate, such as the RBI’s repo rate. When the repo rate is lowered, banks can borrow funds from the RBI at a cheaper rate. This allows banks to pass on the benefits to customers through reduced interest rates on loans.

However, the benefit borrowers receive depends on each bank’s policies. While some banks may pass on the full reduction in interest rates, others might transfer only a portion. Additionally, banks can also keep monthly EMIs unchanged and instead reduce the loan tenure, helping borrowers pay off their loans faster while saving on interest costs.

How Repo Rate Cut Can Impact Your Auto Loan?

Let’s understand how the 25 bps rate cut impacts auto loans with an example.

Suppose you have an auto loan of ₹10 lakh with an interest rate of 10% for a tenure of 5 years. The EMI for this loan would be ₹21,247 per month.

With the repo rate reduced, the interest rate on the loan drops to 9.75%, assuming the bank passes on the full benefit. The EMI amount remains ₹21,149.

However, as mentioned earlier, banks can keep monthly EMIs unchanged and instead reduce the loan tenure, helping you pay off your auto loan faster while saving on interest costs.

Conclusion

The RBI’s decision to cut the repo rate is a welcome move for borrowers, especially as it directly impacts the cost of retail loans such as home and auto loans. While the extent of the benefit will vary depending on the bank’s policies, borrowers can look forward to either reduced EMIs or shortened loan tenures, making loan repayment more manageable. You can contact your bank to understand the impact on your loan.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.