On 6th June 2025, the RBI cut the repo rate by 50 basis points and the Cash Reserve Ratio (CRR) by 100 basis points. It was RBI’s third repo rate cut in successive Monetary Policy Committee (MPC) meetings since February 2025. The interest rate cuts are expected to bring down interest rates on personal loans and other loans.
In this article, we will understand what the repo rate is, the repo rate cuts by the RBI, and how it will impact personal loan interest rates.
What is the repo rate?
Before understanding the impact of RBI repo rate cuts on loan interest rates, let us first understand what is the repo rate. The repo rate or the Repurchase Rate is the rate at which banks borrow money from the Reserve Bank of India (RBI). The money is borrowed by offering Government Securities (G-secs) as collateral to the RBI. The borrowing bank later buys back the G-secs from the RBI at a higher rate, including the interest amount calculated as per the repo rate.
What is the current repo rate?
On 6th June 2025, the RBI cut the repo rate by 50 basis points from 6% to 5.5%. It is the RBI’s biggest repo rate in the last few years. Before that, the RBI cut the repo rate from 6.5% to 6.25% in February 2025, and further from 6.25% to 6.0% in April 2025.
Apart from the repo rate cut, the RBI announced the CRR cut by 100 basis points. It will be done in four equal tranches of 25 basis points each on 6th September, 4th October, 1st November, and 29th November.
Impact of repo rate cut on personal loan interest rates
A cut in the repo rate has a direct impact on the personal loan interest rates. When the repo rate is cut, it lowers the cost of borrowing for banks. When the cost of funds falls for banks, they can lend to customers at a lower rate. Thus, when the repo rate decreases, the interest rates on personal loans and other loans go down.
The RBI’s move to cut the repo rate by 100 basis points or 1% since February 2025 is good news for personal loan borrowers. The borrowers can expect a cut in interest rates on personal loans. If banks lower the interest rates on personal loans by 100 basis points, it will result in huge interest rate savings for borrowers.
Let us understand the savings in interest amount with an example. Kareena wants to take a Rs. 10 lakh personal loan for a tenure of 5 years. At a 12% interest rate, Kareena will have to pay an Equated Monthly Instalment (EMI) of Rs. 22,244. She will pay a total of Rs. 13,34,667 to the bank through 60 EMIs. Thus, the total interest paid by Kareena on the 5-year personal loan will be Rs. 3,34,667.
Now, suppose the bank reduces the personal loan interest rate to 11% after the 100-basis points repo rate cut by the RBI. For the same Rs. 10 lakh personal loan of 5 years, Kareena’s EMI will fall to Rs. 21,742. She will pay a total of Rs. 13,04,545 to the bank through 60 EMIs. The total interest paid by Kareen on the 5-year personal loan will be Rs. 3,04,545.
With the personal loan interest rate falling from 12% to 11%, Kareena’s EMI will fall from Rs. 22,244 to Rs. 21,742. Thus, she will save Rs. 502 every month on her EMI. The total interest paid over the 5-year personal loan will fall from Rs. 3,34,667 to Rs. 3,04,545. Thus, she will have interest savings of Rs. 30,122 over the entire loan tenure.
The table below shows the savings due to changes in personal loan interest rates due to a cut in the repo rate.
|
Personal loan amount & tenure |
Rs. 10,00,000 for 5 years |
Rs. 10,00,000 for 5 years |
|---|---|---|
|
Interest rate |
12% |
11% |
|
EMI |
Rs. 22,244 |
Rs. 21,742 |
|
EMI saving |
Rs. 502 |
|
|
Total interest paid over 5 years |
Rs. 3,34,667 |
Rs. 3,04,545 |
|
Total interest savings |
Rs. 30,122 |
The above-expected interest rate cuts are not just limited to personal loans. The cuts in Repo Rate are expected to lead to a cut in interest rates on most loans like home loans, vehicle loans, business loans, etc.
Why did the RBI cut the repo rate?
One of the important objectives of the RBI is to keep inflation at 4% with a tolerance band of 2 to 6% (+ or – 2%). For April 2025, the CPI inflation rate was at 3.16%, well below the RBI’s target rate of 4%. The lower inflation rate gave the RBI the elbow room to cut interest rates.
Can we expect the RBI to cut the repo rate further?
The RBI expects the CPI inflation to be 3.7% for FY 2025-26. It is within the RBI’s target rate of 4%. However, during his 6th June Monetary Policy statement, the Governor mentioned that after the 100-basis points repo rate cut since February 2025, the RBI is left with limited space to support growth. Hence, the MPC has changed its stance from accommodative to neutral. Going ahead, the MPC will assess the incoming economic data for future course of action. Thus, going ahead, repo rate cuts, if any, will depend on the inflation rate and other economic data.
Should you go for a personal loan now or wait?
As mentioned earlier, there is limited scope for any further repo rate cuts in the near future. It will all depend on how inflation behaves. Banks will pass on the repo rate cut benefit to their customers in the form of lower interest rates on personal loans and other loans. Hence, if you are looking for a personal loan, consider going for it.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
