Home Loan Customers May Need to Wait Until December for Potential Interest Rate Cuts

Home Loan Customers May Need to Wait Until December for Potential Interest Rate Cuts

Home loan borrowers hoping for relief in their EMIs may need to wait until December 2024, as economists predict the Reserve Bank of India (RBI) will delay lowering the repo rate. While some expected a rate cut in the upcoming bi-monthly credit policy review on October 9, experts now believe that the central bank may initiate rate cuts starting in December 2024 and continuing into February 2025. The RBI has maintained the repo rate at 6.5 percent since February 2023, leaving home loan rates unchanged for the past several months.

Economists are forecasting that the RBI may reduce the repo rate by 50 basis points (bps) in two phases, with a 25 bps cut in both December 2024 and February 2025. Aditi Nayar, Chief Economist at ICRA, anticipates that the RBI's Monetary Policy Committee (MPC) could shift its policy stance from "withdrawal of accommodation" to a more "neutral" position in October. This change would signal the start of a more accommodative monetary policy, potentially leading to rate cuts in the coming months. She noted that the views of new external MPC members will be key in shaping these future decisions.

Similarly, Kanika Singh, Chief Risk Officer at the Indian Mortgage Guarantee Corporation (IMGC), expects the rate cuts to begin in December, citing improving inflation trends and the global shift toward monetary easing. She predicts at least a 25 bps cut, in line with other central banks around the world, which have recently lowered their interest rates to stimulate growth. The US Federal Reserve, for example, reduced rates by 50 bps in September, followed by rate cuts from the European Central Bank (ECB), as well as central banks in Switzerland, Sweden, Canada, Brazil, Peru, and China.

Given that home loan interest rates in India are now directly linked to the repo rate, which serves as a benchmark for lending, any reduction in the repo rate will lead to lower EMIs for borrowers. This would particularly benefit those with existing loans, as they stand to save significantly over the course of their loan tenure.

Impact on Home Loan Borrowers:

For example, if a borrower has taken a home loan of Rs 75 lakh for a 20-year tenure at an interest rate of 9 percent, and the rate is lowered to 8.75 percent after three years of repayments, the total amount payable over the remaining tenure will drop to Rs 1.57 crore from Rs 1.62 crore, saving Rs 4.97 lakh. Moreover, the loan would be closed seven months earlier than initially planned.

If the rate is cut further by 50 bps, reducing it to 8.5 percent, the total repayment will fall to Rs 1.51 crore, providing a savings of Rs 11 lakh. Additionally, the loan will be fully repaid 16 months earlier than originally scheduled.

While many are eagerly awaiting these potential cuts, borrowers may have to be patient for a few more months as the RBI takes a cautious approach. The cuts, if they materialise, would help ease financial burdens for home loan customers and reduce overall interest costs.