What the Repo Rate Is, and Why It Moves Your Home Loan EMI
When the RBI changes the repo rate, millions of loan EMIs follow. Here is how that chain works, in plain English.
Every couple of months, the Reserve Bank of India (RBI) announces whether it is changing the repo rate. The announcement makes headlines because it reaches all the way into your monthly budget, through the EMI on your home or car loan.
The repo rate in one sentence
The repo rate is the interest rate at which the RBI lends money to banks for short periods, against government securities as collateral.
Think of it as the “wholesale” price of money. When it becomes cheaper or costlier for banks to borrow, they eventually pass that change on to the “retail” price they charge you.
Who decides it
The repo rate is set by the RBI’s Monetary Policy Committee (MPC), a six-member panel: three from the RBI (including the Governor) and three external members appointed by the government. The MPC’s main job is to keep consumer price inflation close to a target of 4%, within a band of 2% to 6%.
- Inflation running too hot? The MPC may raise the repo rate to cool borrowing and spending.
- Growth slowing and inflation under control? It may cut the rate to encourage borrowing and investment.
How the change reaches your EMI
Since October 2019, banks have had to link new floating-rate retail loans (home, personal and MSME loans) to an external benchmark. Most banks chose the repo rate itself. Your loan rate is typically:
Your rate = Repo rate + bank’s spread
The RBI requires the rate on these loans to be reset at least once every three months. So when the repo rate moves, your loan rate follows within a quarter.
| What happens | Effect on a repo-linked floating loan |
|---|---|
| Repo rate cut by 0.25% | Your rate falls by about 0.25% at the next reset |
| Repo rate hiked by 0.25% | Your rate rises by about 0.25% at the next reset |
| Repo rate unchanged | No change from the benchmark (your spread may still change if your credit profile does) |
EMI or tenure: what actually changes
When rates rise, many banks keep your EMI the same and extend your loan tenure instead. That feels painless, but it can add years of extra interest. After a rate change you can usually ask your bank to:
- Increase the EMI and keep the original tenure, or
- Keep the EMI and accept a longer tenure, or
- Make a part-prepayment to offset the rise.
Check your loan statement after every rate change. Seeing your remaining tenure is the simplest way to know what a rate move really cost you.
Fixed-rate loans and older loans
- Fixed-rate loans don’t change with the repo rate during their fixed period.
- Older loans linked to MCLR or base rate respond more slowly. Some borrowers find it worth switching to a repo-linked loan; compare the conversion fee with the interest you’d save.
The takeaway
The repo rate is the RBI’s main tool for managing inflation, and because most floating loans are now directly linked to it, a policy announcement can change what you pay within three months. For the latest rate, always check the RBI’s official website, rbi.org.in.
This article is for general information only and is not financial, investment or legal advice. See our disclaimer.