Following the Reserve Bank of India's (RBI) decision to cut the repo rate by 50 basis points on June 6, several banks, both across the public and private sectors, have started lowering their lending rates. While the RBI move aims to stimulate credit demand and economic activity, the banks have started passing on the benefits to the customers as they will receive funds from the apex bank at a cheaper rate.
However, the revision in lending rates, bringing down the home loan and personal loan EMIs, will benefit the existing borrowers who have opted for floating-rate loans.
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The RBI has reduced the repo rate by a total of 100 basis points since February 2025. As the repo rate is the rate at which the RBI lends to commercial banks, any cut directly influences interest rates charged by the lenders on various loans, particularly those benchmarked to the Repo-Linked Lending Rate (RLLR).
Among the early responders to this rate cut, public sector lender Bank of Baroda lowered its RLLR from 8.65% to 8.15%. Punjab National Bank and Bank of India both brought their RLLRs down from 8.85% to 8.35%, while Indian Bank followed with a revision from 8.7% to 8.2%. UCO Bank also reduced its RLLR from 8.8% to 8.3%, in addition to trimming its Marginal Cost of Funds Based Lending Rate (MCLR) by 10 basis points across all tenures.
Who Stands To Gain?
These changes hold particular significance for home loan borrowers and small businesses whose loans are tied to external benchmarks like the repo rate. RBI's rate actions have a direct impact on home loan interest rates linked to the repo rate. A lower repo rate usually translates into a reduced RLLR, meaning borrowers pay less interest over the loan's term and often benefit from reduced Equated Monthly Instalments (EMIs).
But the extent of the benefit may differ for new and existing borrowers. Most banks have promptly extended the reduced rates to new customers. For existing borrowers, the benefits will come through only when their loan reaches its scheduled interest rate reset date — typically every three months for RLLR-linked loans.
For customers whose loans are linked to the MCLR, such as those with HDFC Bank, the benefits may take slightly longer to reflect, as MCLR-linked loans adjust more slowly to policy rate changes due to their dependence on a broader range of internal cost factors.
As per reports, cheaper loans could help boost sectors like real estate, with potential positive spillover effects across construction, manufacturing and consumer goods industries.
Understanding The Lending Benchmarks
The RLLR is a lending benchmark linked directly to the RBI's repo rate, allowing for quicker transmission of monetary policy decisions. In contrast, the MCLR is a more complex benchmark based on a bank's marginal cost of funds, operating costs and liquidity needs, leading to a slower adjustment process.
While the recent cuts offer a reprieve to many, new borrowers should compare lending benchmarks carefully when choosing loan products. Opting for a repo-linked loan may offer more immediate responsiveness to rate changes, particularly in a softening interest rate environment.
As banks continue aligning their lending practices with the RBI's monetary stance, borrowers will need to stay informed about their loan types and reset cycles to make the most of these policy shifts.
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