Home loan borrowers are set to experience much-needed relief in 2025 as experts predict interest rate cuts by the Reserve Bank of India (RBI). This shift follows signs of slowing GDP growth and easing inflation, setting the stage for reduced Equated Monthly Installments (EMIs) and better borrowing conditions.
High Interest Rates in 2024: A Year to Forget
The year 2024 brought challenges for home loan borrowers with persistently high interest rates, making it a difficult period for many. However, 2025 offers hope as the RBI is likely to reduce repo rates, signaling the start of a downward interest rate cycle.
RBI’s Steps to Ease Liquidity
The RBI’s recent Cash Reserve Ratio (CRR) reduction from 4.5% to 4% has injected liquidity into the banking system. According to Raoul Kapoor, Co-CEO of Andromeda Sales, this move enables banks to lend more, making loans—particularly home and personal loans—more affordable. This development is expected to:
- Reduce borrowing costs
- Encourage credit uptake
- Support economic growth
Falling GDP Growth Strengthens Rate Cut Demands
India’s GDP growth slowed to 5.4% year-on-year for the September 2024 quarter, raising calls for interest rate cuts. While urban consumption has slowed, experts believe rural consumption and increased government spending will stabilize growth in the upcoming quarters.
Inflation Trends May Support Rate Cuts
Despite recent inflation spikes, HSBC Research predicts inflation will dip below 5% by March 2025, creating room for rate reductions. Sandeep Bagla, CEO of TRUST Mutual Fund, noted that two out of six MPC members have already supported a rate cut, increasing the likelihood of a repo rate cut in early 2025.
Expected Rate Cuts in 2025
Forecasts for rate reductions in 2025 vary:
- HSBC Research: Predicts a 50-basis-point (bps) cut in two phases, reducing the repo rate to 6%.
- Nomura: Anticipates deeper cuts of up to 100 bps during the year.
These cuts would bring significant savings to home loan borrowers and could stimulate real estate purchases.
What Borrowers Should Do
1. Maximize Benefits from Falling Rates
To benefit from the anticipated rate cuts, borrowers should ensure their loan is linked to the External Benchmark-Linked Lending Rate (EBLR). Those on older regimes like BPLR, Base Rate, or MCLR should switch to EBLR for quicker rate transmission.
2. Consider Refinancing
If your current lender offers higher rates than others, consider refinancing or requesting a rate repricing. New borrowers should prioritize banks offering competitive rates.
3. Choose Between EMI Reduction and Faster Repayment
Borrowers have two options when rates drop:
- Keep EMIs constant: Accelerates loan repayment and reduces total interest paid.
- Reduce EMIs: Frees up cash flow but results in higher interest payments over time.
Expert Advice for Borrowers
Adhil Shetty, CEO of Bankbazaar.com, recommends borrowers take the following steps:
- Review loan terms: If your interest rate is higher than market rates, refinance or reprice your loan.
- Prepay when possible: Extra funds can reduce your principal and total interest burden.
New borrowers can look forward to automatic rate reductions if borrowing from banks, while NBFC borrowers should ensure they receive competitive rates.
Conclusion
Home loan borrowers should prepare for significant savings in EMIs as rate cuts are likely in 2025. With proactive steps like switching to EBLR, refinancing, or prepaying, borrowers can make the most of the falling interest rate scenario. Keep an eye on upcoming RBI policies for further updates on this positive shift.
