Home loan EMIs to fall as RBI cuts repo rate for fifth time this year

The Reserve Bank of India today cut its benchmark lending rates by 25 basis points, taking its cumulative repo rate cuts to 135 basis points so far this year. This will be good news for home loan borrowers, especially those who home loans are tied to RBI's repo rates. With RBI still maintaining an accommodative stance, some analysts expect further rate cuts from the central bank, given broad-based demand weakness in the economy.

"The official policy stance remains accommodative, suggesting that further loosening will follow in the near term. We are pencilling in another 25 bps cut in December," said Hilan Shah, senior India economist at Capital Economics.

From October 1, all banks have been asked to link new floating rate retail loans, including auto and home loans, to an external benchmark. For new floating auto and home loans, banks have the freedom to decide the spread over the external benchmark.

Also, the interest rate of the auto and home loan rates should be reset at least once in three months, depending on the change of the external benchmark.

For example, SBI charges a spread of 265 basis points over the RBI's repo rate (currently at 5.15% after the latest cut) to calculate its external benchmark-based lending rate. SBI will also charge a premium for calculating the effective home loan rate for the borrower.

So for borrowers whose home loan rates are linked to repo rate, the EMIs will come down when the rates are reset depending on the change in repo rate.

For home loan borrowers whose home loan rates are linked to the bank's MCLR rates, the EMIs are expected to fall as banks gradually lower their rates.

"We expect some more transmission of rate cuts to borrowers will happen given that the cumulative reduction in repo rate is now 135 basis points during 2019. But that will likely be only a gradual process, given the current weak sentiment and lack of momentum in investments and credit demand from larger corporates in several pockets of the economy," Siddhartha Sanyal, chief economist and head of research at Bandhan Bank.

Existing home loan borrowers under floating rate loan schemes, who can prepay the loan without pre-payment charges, will be eligible for switch over to the new external benchmark-linked loan without any charge/fees except administrative/legal cost, the RBI had said earlier. (With Agency Inputs)