On June 6, 2025, the Reserve Bank of India (RBI) rolled out another round of monetary policy adjustments, reducing the repo rate by 50 basis points to 5.5% and the Cash Reserve Ratio (CRR) by 100 basis points to 6%. This move follows the RBI’s previous interest rate cuts, marking its third repo rate reduction since February 2025. Such interest rate cuts are anticipated to lower personal loan rates and other loans.
Why This Matters
Understanding the Repo Rate:
The repo rate, or Repurchase Rate, is a critical metric set by the RBI for money borrowed from the central bank. Borrowing agreements are collateralized with government securities, making this rate significant in determining loan interest rates.
Repo Rate Cut Explained
The RBI cut the repo rate by 50 basis points, bringing it down to 5.5%. This is the RBI’s largest rate cut in recent times. Prior reductions led to a rate reduction from 6.5% to 6.25% in February, then further to 6% in April. A 100-basis point reduction in the CRR is also part of these adjustments, spread out over four tranches.
Impact on Personal Loan Rates
Cutting the repo rate directly affects personal loan interest rates. Because banks’ costs of borrowing fall, they can offer lower interest rates to customers. Lower repo rates mean reduced costs for banks, which in turn lower personal loan interest rates.
Example Savings
Let’s break this down with an example:
Scenario: Kareena aims to take a 10-lakh personal loan for five years at an initial 12% interest rate. At this rate, her EMIs would be 22,244, leading to total payments of 13,34,667 (EMIs x 60 instalments).
At a 100-basis-point reduction in the interest rate, her new rate would be 11%.
With interest lower
- Her EMI = 21,742
- Total interest paid = 3,04,545
- Savings = 13,34,667 – 13,04,545 = 3,01,22
Your personal loan interest rate can drop by 1% once the repo rate cuts take effect. This shift could significantly lower your EMI by Rs 502 monthly and decrease the total interest paid by Rs 3,01,22 for the 5-year tenure.
Future Projections
These interest rate cuts are expected to affect most loans such as property loans, vehicle loans, and business loans. The RBI sets its inflation target at 4%. It anticipates an inflation rate similar to its targets. However, it remains cautious, considering that there’s limited space for monetary policy cuts to support growth.
Conclusion
For loan seekers, now is a good time. The RBI is considering less despite its target for lowering inflation under its Monetary Policy Committee (MPC). If you want a personal loan, now is a favorable opportunity, and acting now ensures your EMIs are lower than they could be in the future.
