RBI Cuts Repo Rate by 25 bps to 5.25%; EMIs for Home, Auto and Personal Loans Set to Fall

The Reserve Bank of India (RBI) cut the repo rate by 25 basis points (0.25%) to 5.25% today, December 5th. The central bank has cut the repo rate by a total of 125 basis points since February this year. A lower repo rate means banks will receive lower interest rates from the RBI, and this will translate into reduced home loan, auto, and personal loan installments. Home loan borrowers will see the biggest benefit from this rate cut.

When banks borrow money at lower interest rates, they reduce interest rates on both new and existing floating-rate loans. This reduces EMIs and increases loan eligibility. The Weighted Average Lending Rate (WALR) has already declined by 60 bps in the past few months; this reduction will further reduce the rate.

Similarly, deposit rates will also see changes, as Weighted Average Term Deposit (WATD) rates have already been reduced by 105 bps on new deposits and 32 bps on old deposits. Fixed deposit interest rates may decline further. The RBI has also announced major measures to maintain liquidity in the market. This includes OMO (Open Market Operations) purchases worth ₹1 lakh crore and a 3-year USD/INR buy-sell swap.

The aim is to provide durable liquidity to the banking system, meaning sufficient liquidity over a long period of time. Since the October MPC meeting, there has been a surplus of ₹1.5 lakh crore in the system, which has kept money market rates generally around the repo rate.

The RBI can also control temporary liquidity through tools like VRRR if needed. The situation on the foreign capital inflow front is also stable. Gross and net FDI increased in the first quarter, while outflows decreased, leading to an improvement in net investment. ECBs and NRI deposits have declined compared to last year, but overall, India's external sector remains resilient and funding needs will be met easily. CPI inflation projections show increasing stability.

Average inflation is projected to be 2.0% in FY26, down from 2.6% previously. Inflation is expected to remain within manageable limits in the coming quarters, leaving room for further repo rate cuts. Overall, this RBI decision is a major positive signal for the real estate sector and consumer demand and will accelerate growth by providing easy and affordable financing to the economy.