RBI rate cut: What it means for retail borrowers, banks

Borrowers to see lower EMIs after rate cut, but banks may take a hit on margins

- Shayan Ghosh

MUMBAI: The Reserve Bank of India's (RBI) monetary policy committee on Friday delivered a much-anticipated rate cut of 25 basis points, taking the policy repo rate to 6.25%.

This is the first rate cut in five years and comes amid slowing credit growth and easing inflation. The decision of the Monetary Policy Committee (MPC) is expected to lead to lower equated monthly installments (EMIs) for retail borrowers by an equivalent amount, provided their borrowing rates are linked to an external benchmark, especially the repo.

The repo rate is the interest rate at which commercial banks borrow from the RBI. Given that a majority of floating rate loans are linked to external benchmarks, the impact of the repo rate cut is expected to be far-reaching.

Mint takes a look at what this means for thousands of retail borrowers as well as lenders.

How will the central bank's rate cut lead to changes in the interest rates for borrowers?

At present, retail and small business loans are linked to external benchmarks, and corporate loans are still on the marginal cost of fund-based lending rate or MCLR.