The RBI's decision to cut the repo rate puts the average person in a tough spot: they can get help with their loans, but their savings will be tight.

The repo rate has been lowered by the RBI by 25 basis points to 5.25%. Interest rates on fixed deposits and small savings plans will also go down, but home loan EMIs will go down.

The Reserve Bank of India's 25 basis point repo rate cut keeps the Indian economy in the "Goldilocks Zone," but it makes things hard for regular people.

The Reserve Bank of India's Monetary Policy Committee has lowered the benchmark repo rate by 25 basis points to 5.25%. This is expected to help the Indian economy grow. The RBI repo rate cut is good news for borrowers, but not so much for the average person. It will lower home loan EMIs right away, but it will also make it less likely that traditional savings accounts like fixed deposits will earn a lot of interest.

The repo rate is the interest rate at which the RBI lends money to commercial banks. It is a very important part of the Indian economy. If this rate goes down, banks can borrow money for less. The RBI wants the lower cost of borrowing to be passed on to the end consumer in the form of lower lending rates.

How the RBI rate cut affects home loan EMIs

The RBI rate cut means a long-awaited financial break for a large part of the population. People with home loans, car loans, and other retail loans that are tied to the repo rate will feel the most immediate and positive effects.

1. Home Loan Interest Rates: Most new floating-rate home loans have been linked directly to the repo rate since October 2019. For these borrowers, the 25 bps cut should mean that their home loan interest rates go down, which should also mean that their monthly EMIs go down.

• For a loan of, say, ₹50 lakh over 20 years, even a small drop in the interest rate can save you a lot of money over the life of the loan. Because this benefit will be sent out quickly, both new and existing borrowers can expect to pay less in interest. That helps the family's finances and encourages them to buy more.

2. Increase in Credit Demand: Lower interest rates on home and auto loans are likely to lead to more demand in these capital-intensive sectors. This, in turn, is expected to give the manufacturing and services sectors a big boost, which could lead to more jobs and a stronger economy overall.

In short, the RBI repo rate cut should quickly and directly affect loans that are linked to the repo rate.

Existing borrowers: Your interest rate is based on the repo rate plus the bank's fixed spread. The 25 bps cut will lower your interest rate by a similar margin, leading to a direct decrease in your EMI or a reduction in your home loan tenure.

New borrowers: You will benefit from a lower starting rate, enhancing housing affordability and market sentiment.

RBI rate cut impact on fixed deposit (FD) interest rates

While borrowers celebrate, the news is not as cheerful for conservative savers, who rely heavily on interest income from instruments such as fixed deposits (FDs).

1. Fixed Deposit Interest Rates: In the past, the repo rate and the interest rates on bank FDs have moved together. When the RBI lowers the repo rate, banks pay less for money, so they are likely to lower the interest rates they offer on FDs to protect their net interest margins.

2. Effect on Current FDs: It's important to remember that the RBI rate cut won't change the interest rate on current fixed deposits.

But for people who want to renew their FDs or make new investments, the returns will be lower. This will make it harder for retirees and people who are saving for future financial goals to make ends meet. The time to lock in higher rates is running out quickly.

In short, the relationship between the repo rate and FD rates is the opposite of the relationship between loans and FD rates. Banks will probably lower the rates on new fixed deposits to keep their profit margins because the cost of funds for banks has gone down.

• The repo rate was cut by 25 basis points, but banks may lower FD interest rates by a smaller amount (10 to 15 basis points) or by the same amount, since they have to balance their need for money with the central bank's policy.

• It is very important to lock in the current, pre-cut rates before banks announce their new deposit rates, especially for longer terms.

How small savings plans are affected by the RBI rate cut

The RBI repo rate cut will not have an immediate or direct effect on government-run small savings plans like the Public Provident Fund (PPF), the National Savings Certificate (NSC), the Senior Citizen Savings Scheme (SCSS), and the Sukanya Samriddhi Yojana (SSY).

1. Government-Driven: The Union Ministry of Finance sets the interest rates for small savings schemes, which are usually reviewed and announced every three months. They are usually linked to the yields of government bonds with the same maturity, plus a small margin.

2. Policy Buffer: Even though the repo rate has been cut several times in the past, the government has often kept the interest rates on many small savings plans the same to protect the income of middle-class families.

In short, the RBI repo rate doesn't affect the interest rates on small savings plans, but savers should keep an eye out for the next quarterly review.

What should you do now?

If you have a home loan with a floating rate, call your bank to find out when your EMI will go down. If you save money, think about long-term options like equity-linked savings or locking in your current FD rates before banks lower them even more.

How the RBI rate cut will affect the Indian economy

The Reserve Bank of India's Monetary Policy Committee used the "Goldilocks Zone" of high growth and low inflation to cut the repo rate and get more credit into the Indian economy. People are hopeful that the average person will now feel good about their finances and be able to buy that new car and even a new home.