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

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Subscribe to enjoy similar stories. Mumbai: 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%. The first rate cut in five years, the Monetary Policy Committee's decision will lead to lower equated monthly instalments 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. 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.

Meant to induce seamless transmission of rate changes by the central bank to bank lending rates, external benchmarks have in the past allowed retail borrowers to benefit when RBI was on a rate-cutting spree after the covid-19 pandemic. This is going to be repeated this time round as well. Retail borrowers who have taken floating rate loans will see their EMIs shrink as banks pass on the benefit of lower repo rate to end consumers.