Home loan consumers, struggling under the burden of high EMIs, finally have a reason to smile after RBI Governor Raghuram Rajan cut repo rate by 0.25 per cent on Thursday.
State-run United Bank and Union Bank have already cut their base rates - the lowest lending rates - and other lenders are likely to follow suit.
"We believe that this cut may be just the beginning of a rate easing cycle... Base rate is expected to fall faster than expected," said Arundhati Bhattacharya, chairman of State Bank of India.
So, over the next couple of years, EMI for a 50 lakh loan could come down by as much as Rs 8,000 per month - enough to pay the EMI for a hatchback such as Maruti Swift.
It is for these economic cross-linkages that government had been demanding an interest rate cut for the last many months. Lower interest rates will not only attract more consumers into buying properties and cars, but the substantial saving for existing customers would trigger discretionary spending on a large scale, which will boost demand in the economy.
The rate cut would put more money in the hands of consumers and help revive investment," said Finance Minister Arun Jaitley.
Increased demand will lead big corporates to invest in capacity expansion, leading to creation of more jobs and will further help economy.
"In our view, the sharper decline in cost of capital will help to provide further support to the domestic demand and GDP growth," said Morgan Stanley.
Automakers, who have struggled over the past three years, will likely gain more than property developers because of the added advantage of falling fuel prices. Global crude prices are down 50 per cent since the highs of June 2014 resulting in substantial drop in domestic petrol and diesel prices.
Unlike home loans - which generally have a floating rate - most auto loans carry a fixed rate. So, existing customers are unlikely to benefit from falling interest rates, but new buyers can benefit from lower rates over five/seven year tenure.
Many other types of loans ranging from personal loans to small-ticket size loans for consumer durables (for bikes, LED TVs, etc.) will come down as banks start reducing base rates.