Inflation at an all-time low: What does it mean for your loan EMIs?
In a surprising turn of events, India's retail inflation, or the Consumer Price Index (CPI), has reached a historic low of 0.25% in October. This news might bring a smile to the faces of many, as it not only signifies a slower increase in prices but also opens up the possibility of reduced loan EMIs in the near future.
The October inflation rate is the lowest since the CPI series began in 2013, dropping significantly below the Reserve Bank of India's (RBI) target range of 2-6%. This unexpected decline in inflation numbers puts the central bank in a favorable position to consider further rate cuts in the coming months, providing a much-needed growth impetus to the Indian economy, especially with the impact of Donald Trump's 50% tariffs on exports.
India, being the world's fastest-growing major economy, faces uncertainty regarding the India-US trade deal, which has kept the RBI in a cautious mode regarding growth measures. However, economists now believe that a repo rate cut in December is highly likely, given the current economic landscape.
The RBI initiated its rate easing cycle in February this year, and since then, the repo rate has been reduced by 1%. This reduction is expected to translate into lower loan rates, benefiting loan borrowers by reducing their interest outgo and EMIs.
But how much of an impact has this 1% rate cut had on your finances? And will your EMIs continue to decrease? Let's delve into the details and explore the implications of India's record-low inflation, the RBI's policy outlook, and what it means for loan takers in 2026.
Inflation Miracle: Lowest in Over a Decade!
According to the National Statistics Office, retail inflation eased to 0.25% in October, a significant drop from the 1.4% recorded in September and a substantial decrease from the 6.2% seen in October of the previous year. Interestingly, food inflation entered the deflationary zone, contracting by 5% in October.
This represents a decrease of 269 basis points compared to September, and the food inflation in October is the lowest in the current CPI series.
But what does the future hold? Most economists believe that retail inflation has reached its lowest point and is likely to rise in the coming quarters. However, the consensus is that it will remain manageable and within the RBI's comfort zone, allowing the central bank to provide growth support to the economy if needed.
Dipti Deshpande, Principal Economist at Crisil Limited, explains that October witnessed the strongest base-effect support for food prices, which helped pull down headline inflation. She adds that while this effect will fade, limiting further declines in food inflation, some upward pressure on headline inflation is expected in the coming months.
Yuvika Singhal, Economist at QuantEco Research, shares a similar view, stating that although CPI inflation is expected to bottom out in Q3 FY26 and gradually increase thereafter, the outlook remains positive for the foreseeable future. The sustained downward pressure on food prices since the beginning of the year, coupled with recent price adjustments due to GST changes, has systematically lowered the CPI inflation curve for FY26.
Singhal estimates that FY26 CPI inflation will average at 2.1%, compared to the earlier projection of 2.6%. Consequently, CPI inflation is estimated to be lower in H2 FY26, averaging at 1.9%. Several factors contribute to this favorable outlook, including the positive impact of a strong monsoon on Kharif crop output, healthy reservoir levels facilitating early Rabi sowing, and restrained increases in the Minimum Support Price (MSP) for both Kharif and Rabi crops, collectively contributing a disinflationary impulse of approximately 10 basis points.
Additionally, the government's sweeping cuts in the Goods and Services Tax (GST) in September, modifying the slab structure into two broad rates - 5% and 18%, have further supported this downward trend in inflation. According to Nomura, there was a 0.12 percentage point impact of GST cuts in the October numbers, and the full impact is expected to be reflected in the coming months.
Nomura estimates that a full transmission of the GST cuts could result in a 1.6 percentage points reduction to the retail inflation basket. Yuvika Singhal agrees, stating that the GST rate cuts have definitely impacted the inflation trajectory and the sharper-than-expected fall in CPI. She explains that while it is challenging to quantify the exact impact of GST restructuring on monthly CPI inflation, there has been a disinflationary impulse due to GST changes in Sep-25.
According to CRISIL's Dipti Deshpande, a closer look at inflation data indicates that most household electronics and automobiles have already reflected the GST benefits, while the pass-through in fast-moving consumer goods is still in progress.
Will the RBI Cut the Repo Rate in December?
At the start of 2025, the repo rate stood at 6.5%, and as the year draws to a close, it has decreased by a full 100 basis points! Where will this easing cycle stop? Will the RBI wait for more clarity on the India-US trade deal, or is it time for another rate cut?
Dipti Deshpande expects the RBI to cut the repo rate in the December policy review, which is scheduled between December 3-5. She believes that the consistent decline in CPI inflation this fiscal year, pushing the average inflation for the first five months down to 1.9% (below the RBI's lower inflation tolerance band), creates space for monetary easing. Deshpande sees a likelihood of a 25 basis points repo rate cut in December.
Yuvika Singhal of QuantEco Research also expects a 25 basis points reduction in the repo rate to 5.5%. She maintains the expectation that the RBI will announce a 25 basis points repo reduction at its Dec-25 policy meeting, given the deeper-than-anticipated trough in FY26 CPI inflation. While the domestic environment continues to support the growth outlook, driven by GST reductions and strong government capital expenditure, the external landscape remains challenging, with the US tariffs on Indian goods posing a significant vulnerability.
Will Loan EMIs Continue to Decrease in 2026?
The calculation for your home or car loan interest rate is straightforward: The RBI lends to commercial banks at an interest rate known as the repo rate. If the repo rate is high, banks charge their customers a higher lending rate for loans. Conversely, a lower repo rate allows banks to charge a lesser interest rate, resulting in decreased EMIs for borrowers.
With the RBI cutting the repo rate by 1% this year, EMIs have also decreased for new borrowers and those with floating interest rate loans. However, the financial system operates with a lag, and it takes some time for banks to pass on the benefits of the lower repo rate to borrowers.
According to BankBazaar.com, most major banks have cut their lending rates anywhere from 85 to 110 basis points. While public sector banks (PSBs) were early to reduce rates, most large private sector banks (PVBs) have followed suit. The spread on the repo has also shrunk across PSBs and PVBs, with most PSBs currently charging a spread of 2% or less. Historically, PVBs charge a higher spread, with most above 2%, but the spreads have shrunk here as well.
Adhil Shetty, CEO at BankBazaar.com, provides an example: If the original home loan interest is assumed to be 8.5%, with a 1% transmission, it now stands at 7.5%. For a home loan with a 20-year tenure, this results in a substantial reduction in interest outgo. For instance, for a Rs 30 lakh home loan, the earlier interest payment would have been Rs 3,248,327, but with the reduced rate, it stands at Rs 2,800,271, saving Rs 448,056 over the loan term. Similar savings can be seen for loans of Rs 50 lakh, Rs 1 crore, and Rs 1.5 crore.
So, will this interest burden continue to decrease in the coming months? It's quite possible! Adhil Shetty explains that home loan EMIs are directly linked to the repo rate, and any change in the repo rate will cause EMIs to adjust. Given the low levels of inflation, it is highly probable that the RBI will cut rates again in this fiscal year. The US Fed's decision to cut rates despite high inflation in the US could further influence the RBI's decision.
With more rate cuts expected in the upcoming policies, loan borrowers can look forward to potential financial benefits in the new year!
