RBI repo rate cut: How does it affect the average Indian; explained

In a move aimed at energising the Indian economy amid rising global uncertainties, the Reserve Bank of India (RBI) recently announced a 25 basis point cut in the repo rate, bringing it down to 6%.

The decision, which marks the second such cut in 2025, is part of the central bank's broader shift towards an ‘accommodative’ policy stance and comes in response to US President Donald Trump’s tariff wars.

But what does this technical-sounding announcement mean for the average Indian? Here's an explainer.

What is the Repo Rate?

The repo rate is the interest rate at which the RBI lends money to commercial banks for the short term.

When the repo rate is high, borrowing becomes more expensive for banks, which in turn pass the cost onto consumers. Conversely, a reduction in the repo rate makes loans cheaper for banks, encouraging them to lend more to businesses and individuals.

A repo rate cut is typically used as a tool to spur economic activity, particularly in times of slowdown or external pressures, such as the recent imposition of new US tariffs on Indian exports.

Why Has the RBI Cut the Repo Rate?

To Stimulate Economic Growth: The Indian economy is facing growth headwinds from global trade uncertainties. A lower repo rate aims to make borrowing cheaper, thereby encouraging spending and investment.

External Pressures: The recent hike in tariffs by the United States on key Indian exports has raised concerns about trade and GDP growth. Lower interest rates can act as a buffer by enhancing domestic demand.

Inflation Under Control: Consumer inflation remains within the RBI's comfort zone, giving it room to ease rates without stoking price pressures.

Impact on Borrowers

For consumers, particularly those with existing or planned loans, a repo rate cut can bring multiple benefits:

Lower EMIs: With banks likely to pass on the reduced repo rate, interest rates on home, car, and personal loans are expected to drop. For example, on a 10-year ₹40 lakh home loan, a 1% reduction in interest rate can save around ₹2.6 lakh in total interest.

Increased Loan Eligibility: Lower interest rates mean reduced monthly repayment obligations, which can improve eligibility for larger loan amounts.

Refinancing Opportunities: Those with older loans might consider refinancing to take advantage of the new lower rates.

Impact on Savers

While borrowers gain, savers may feel the pinch:

Lower Fixed Deposit Returns: Banks often cut deposit interest rates in tandem with lending rates, reducing the income for those relying on savings.

Shift in Investment Strategies: Lower returns on traditional saving instruments may push individuals towards mutual funds or equities in search of better yields.

Wider Economic Implications

Boost to Consumer Spending: Cheaper credit can drive spending on big-ticket items, supporting businesses and retailers.

Encouragement for SMEs: Small and medium enterprises, often hit hardest by high borrowing costs, could see a reprieve, aiding employment and output.

Monetary Policy Coordination: The RBI’s rate cut aligns with global central banks easing policy to counteract economic headwinds.

Points to Remember for Consumers

Transmission Varies: Not all banks may immediately pass on the full benefits of the rate cut. It's advisable to check with your bank and consider switching if better terms are available elsewhere.

Floating vs. Fixed Rates: Those with floating-rate loans will benefit sooner than those on fixed-rate arrangements.

Monitor Market Trends: Consumers should stay informed about further rate changes and policy directions that may impact borrowing and investment decisions.

The RBI’s repo rate cut is a deliberate move to soften the impact of global economic pressures and support domestic momentum. For the average Indian, the implications are twofold: cheaper loans and potentially reduced savings returns.