Home, auto loans may cost even less with RBI

• ET Bureau

• Published On Dec 7, 2025 at 03:25 PM IST

Home and car loans are set to get cheaper after the Reserve Bank of India (RBI) Friday cut the repo rate by 25 basis points to 5.25 per cent, the fifth reduction in 2025. The move is expected to nudge banks to further reduce lending rates, offering relief to home, auto and personal loan borrowers. One basis point is a hundredth of a percentage point.

Banks have already trimmed lending rates through the year. In response to the cumulative 100-basis-point cut in the policy rate before Friday, the weighted average lending rate (WALR) of scheduled commercial banks on fresh rupee loans fell 69 basis points between February and October 2025, while the pure interest rate effect stands at 78 basis points.

The WALR on outstanding rupee loans eased by 63 basis points during the period, reflecting broad-based transmission across sectors.

“Transmission has been broad-based across sectors,” RBI Governor Sanjay Malhotra said. He added that lending rates on outstanding loans declined by 63 bps, while deposit rates corrected more sharply; fresh term deposit rates have fallen by 105 bps and outstanding deposits by 32 bps.

Government bond yields were steady, with the 10-year benchmark slipping to 6.47 per cent from 6.53 per cent a day earlier after the policy announcement. SBI’s home loan rates linked to the external benchmark currently range between 7.50 per cent and 8.70 per cent, depending on credit score and loan size, while auto loan rates start at 8.75 per cent.Money market conditions remained comfortable with the policy rate.

Average daily net absorption under the liquidity adjustment facility (LAF) moderated to ₹90,000 crore in October from ₹2.9 lakh crore in August, before rising to ₹1.9 lakh crore in November. On December 3, net absorption stood at ₹2.6 lakh crore.

Meanwhile, the WALR on fresh rupee loans for banks has risen by 14 bps to 8.64 per cent at the end of September, aided by portfolio mix changes.

Banks have been guarding their margins by lending more to lower-rated companies and higher-yielding retail segments.

Risk Appetite

“Banks are protecting their margins by consciously shifting toward higher-yield, lower-rated borrowers,” said Sanjay Agarwal, director at Care Ratings. “Net spreads have been under pressure for some time, and lenders are now defending them through asset choices.”

Also, Agarwal said that over the past four or five years, banks’ risk appetite was very low.

“With a robust credit environment and low GNPA ratios, this trend is now normalising with banks seeking better yields,” Agarwal said. “With banking industry figures of GNPA, NNPA and credit costs being at their lowest ever, the willingness for higher yields is getting reinforced.”

RBI data showed loans to individuals and riskier segments such as micro and small enterprises growing at 14 per cent and 26 per cent year-on-year, outpacing the 11 per cent expansion in overall non-food credit.

“The interest margin for banks will be negatively impacted as the external benchmark-linked loans will reprice downward shortly, while the deposit base will get repriced downward slowly,” said Anil Gupta, senior vice president, ICRA.

However, the liquidity infusion measures shall improve the transmission of rate cuts in bulk deposit rates, which can partially offset the pressure on NIMs, said Gupta. The RBI has announced buying back ₹1 lakh crore bonds through open market operations in December and conducting a currency swap worth $5 billion.

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