RBI's rate cut and how it will benefit retail borrowers

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%.

- Shayan Ghosh

MUMBAI: The first rate cut in five years, the Monetary Policy Committee's decision will lead to lower equated monthly installments or EMIs by retail borrowers by an equivalent amount, provided their rates are linked to the repo. Repo rate is the interest rate at which commercial banks borrow from the RBI.

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

How will RBI's rate cut lead to changes in 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. EBLR refers to external benchmark-based lending rate, which, as the name suggests, is linked to benchmarks like the RBI repo rate and is used to price loans.

As of September 2024, over 59% of all floating rate loans were linked to an external benchmark, while 37% were linked to MCLR. A change in repo rate, therefore, translates to an equivalent change in the external benchmark rates of banks.