Banks Urged to Pass RBI’s Rate Cut Benefits to Borrowers; Cheaper Loans on the Horizon for Home and Vehicle Buyers

The Reserve Bank of India’s recent decision to slash the repo rate by 0.50% is expected to bring welcome relief to borrowers across the country. However, despite the central bank’s move, many lenders have only reduced their interest rates slightly, leaving loan costs still relatively high for consumers. The RBI has emphasized the need for banks to fully pass on these rate cuts to customers, making loans more affordable for homebuyers, vehicle purchasers, and others.

In June 2025, the RBI brought down the repo rate from 6.00% to 5.50%, aiming to stimulate borrowing and ease financial burdens. This cut has the potential to reduce equated monthly installments (EMIs) for many borrowers, but the impact will only be felt if banks align their lending rates accordingly.

Why This Rate Cut Matters Now

According to the RBI’s June bulletin, the current economic environment is conducive to banks lowering their lending rates more substantially. Many banks have already adjusted their rates after previous cuts in February and April, but this latest move signals an opportunity for deeper reductions.

Key banks such as State Bank of India (SBI), Bank of Baroda (BoB), and HDFC Bank have recently announced downward revisions in their loan interest rates, responding to the RBI’s policy change.

India’s Resilience Amid Global Uncertainties

While the world grapples with economic uncertainties, including trade tensions and the ripple effects of ongoing geopolitical conflicts, India continues to make steady strides. Industrial and service sectors are growing steadily, and agricultural production for 2024-25 is on track with normal expectations.

Inflation has also eased, declining for the fourth consecutive month as of May 2025. These factors combined suggest that India is relatively well-positioned to withstand external shocks from global tensions.

Additional Liquidity Boost for Banks

The RBI also announced a reduction in the Cash Reserve Ratio (CRR), expected to release approximately Rs 2.5 lakh crore into the banking system by December 2025. This influx of liquidity will provide banks with more funds to lend, potentially driving down borrowing costs even further.

Lower cost of funds will facilitate smoother transmission of monetary policy through the credit market, enabling banks to reduce interest rates without needing additional capital.

Snapshot of Affordable Home Loan Interest Rates

Here are the current interest rates offered by major banks for home loans, reflecting recent rate cuts:

Union Bank of India: 7.35%

Bank of Maharashtra: 7.35%

Canara Bank: 7.40%

State Bank of India (SBI): 7.50%

Punjab National Bank (PNB): 7.50%

Bank of Baroda (BoB): 7.50%

Bank of India: 7.85%

LIC Housing Finance: 7.50%

HDFC Bank: 8.45%

ICICI Bank: 8.50%

Kotak Mahindra Bank: 8.20%

Axis Bank: 8.75%

How the Repo Rate Cut Affects Borrowers

Loans linked to external benchmarks like the Repo Linked Lending Rate (RLLR) or the External Benchmark Lending Rate (EBLR) are directly influenced by changes in the RBI’s repo rate. When the repo rate falls, the benchmark lending rates drop accordingly, reducing the interest burden on borrowers with floating rate loans.

This means lower interest payments over the loan tenure and a potential decrease in EMIs. Borrowers aiming for smaller EMIs can maintain their loan tenure and benefit from reduced monthly payments. However, these lower EMIs typically take effect only after the loan’s reset date, which usually occurs quarterly.

Recent Rate Reductions by Major Banks

Several banks have recently updated their lending rates to reflect the RBI’s rate cut:

Indian Overseas Bank: Cut RLLR from 8.85% to 8.35% effective June 12, 2025.

State Bank of India (SBI): Reduced RLLR from 8.25% + Credit Risk Premium to 7.75% + Credit Risk Premium effective June 15, 2025.

Union Bank of India: Lowered both EBLR and RLLR by 50 basis points, with EBLR now at 8.25%, effective June 11, 2025.

Canara Bank: Decreased RLLR from 8.75% to 8.25%, effective June 12, 2025.

Punjab National Bank (PNB): Reduced RLLR from 8.85% to 8.35%, effective June 9, 2025, including a 20 basis points bank spread.

Bank of Baroda (BoB): Cut Baroda Repo Based Lending Rate (BRLLR) from 8.65% to 8.15%, effective June 7, 2025.

Bank of India: Reduced Repo Based Lending Rate (RBLR) from 8.85% to 8.35%, effective June 6, 2025.