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Home loan EMIs may drop by ₹11 lakh with expected 50 bps repo rate cut in December 2024

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Home loan borrowers hoping for a reduction in their EMIs may need to be patient, as economists predict that the Reserve Bank of India (RBI) is unlikely to announce a rate cut in its upcoming bi-monthly credit policy on October 9. Instead, the central bank is expected to introduce rate cuts in December 2024 and February 2025, according to economic forecasts. The RBI’s repo rate has remained steady at 6.5% since February 2023, and although a rate cut is anticipated, it will not come immediately.

Economists predict that the RBI may opt for a 50-basis point (bps) reduction in two phases—25 bps each in December 2024 and February 2025. This gradual approach is in line with global monetary easing trends, where central banks such as the US Federal Reserve, European Central Bank (ECB), and others have already reduced interest rates. Chief Economist at ICRA, believes that while the RBI may keep rates unchanged in October, it could change its stance from “withdrawal of accommodation” to “neutral.” This shift could pave the way for future rate cuts, depending on inflation trends and global economic conditions.

Given that home loan interest rates are directly linked to the RBI’s repo rate since October 2019, a rate cut will directly impact home loan borrowers. If the repo rate is reduced by 50 bps as predicted, borrowers can expect lower EMIs or shorter loan tenures, depending on their preferences.

For instance, if a borrower has taken a ₹75 lakh home loan payable over 20 years at a 9% interest rate and the rate drops to 8.75% after 36 months, the total repayment amount would fall from ₹1.62 crore to ₹1.57 crore. This change could save the borrower around ₹4.97 lakh and shorten the loan tenure by seven months. If the rate cut is more substantial, such as a 50 bps reduction to 8.5%, the total repayment would drop to ₹1.51 crore, saving the borrower ₹11 lakh and shortening the loan term by 16 months.

Nationalized banks are expected to pass on the benefits of a repo rate cut immediately, while private banks may take longer—typically implementing the cut at the start of the following month or quarter, depending on the loan agreement. Borrowers with floating rate loans will have the option to either lower their EMIs or maintain their current EMIs and reduce the loan tenure.
In a declining interest rate environment, borrowers can also consider refinancing their home loans with lenders offering lower interest rates. This can help borrowers take advantage of better deals and minimize their overall repayment costs.

Home loan borrowers in India may have to wait until December for any significant reduction in their EMIs, the prospects of repo rate cuts in late 2024 and early 2025 offer potential relief. With expectations of a 50-bps rate cut, borrowers can look forward to saving on interest payments or shortening their loan tenures. However, immediate action is unlikely, with the RBI expected to keep its rates steady in the upcoming October policy review.

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