Reserve Bank of India Cuts Repo Rate by 25 Basis Points to 5.25%

The Reserve Bank of India (RBI) has announced a reduction in the policy repo rate by 25 basis points, lowering it to 5.25%. This decision has been welcomed by various industry bodies, including the Federation of Indian Chambers of Commerce and Industry (FICCI), the Engineering Export Promotion Council of India (EEPC), and the Federation of Indian Export Organisations (FIEO).

Anant Goenka, President of FICCI, expressed optimism regarding the RBI's move, stating that the reduction in the repo rate is a strategic measure aimed at stimulating credit uptake. He emphasised that this adjustment is likely to lower borrowing costs for both industries and consumers, thereby reinforcing the ongoing growth momentum within the Indian economy.

Goenka further noted the upward revision of India’s GDP growth forecast from 6.8% to 7.3% for the current fiscal year, attributing this to the economy's resilience and the positive effects of continued policy and reform measures, including the rationalisation of the Goods and Services Tax (GST).

The Federation of Indian Export Organisations also welcomed the RBI's decision, describing it as a timely and beneficial step that would alleviate liquidity constraints and enhance the competitiveness of Indian exports.

In the wake of this announcement, home loan rates are anticipated to fall to around 7.1%, levels not seen since the COVID-19 pandemic. Several banks, including Union Bank and Bank of India, currently offer home loans at rates of 7.35%. A 0.25 percentage-point decrease in the rate could reduce the monthly instalment on a ₹1 crore home loan over 15 years by approximately ₹1,440.

Bankers suggest that for new borrowers to access rates as low as 7.1%, lenders may need to significantly cut deposit rates or adjust the spread over the benchmark rate. This could lead to higher interest costs for new borrowers compared to existing floating-rate customers. Despite the potential compression of net interest margins for banks, non-banking finance companies (NBFCs) are expected to benefit from lower funding costs.

Umesh Revankar, Executive Vice-Chairman of Shriram Finance, commented on the implications of the policy for the NBFC sector, noting that the ongoing neutral stance and the RBI's announcement to purchase ₹1 lakh crore in government securities will ensure favourable liquidity conditions. This, he argues, will enable faster transmission of rate cuts to grassroot levels, benefiting small truck operators, rural entrepreneurs, and micro, small, and medium enterprises (MSMEs) that drive economic growth.

While banks are focusing on lending to higher-yielding segments, they remain cautious about defaults. Data from the RBI indicates a shift by banks towards securing loans with collateral, such as gold and auto loans, rather than providing unsecured personal loans. The landscape of credit growth in India is currently characterised by a strong demand from the MSME and retail segments, as large corporates increasingly seek funding outside the traditional banking system through equity and bonds.