What the repo rate is
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term money to commercial banks. Banks borrow at this rate when they need funds for a few days, usually by pledging government securities as collateral. Because it sets the base cost of money for banks, it is the main lever the RBI uses to influence interest rates across the economy.
The RBI's Monetary Policy Committee (MPC) reviews the repo rate at scheduled meetings during the year. The committee can raise it, cut it, or leave it unchanged, depending on its reading of inflation and economic growth.
How it reaches your loan EMI
Most new floating-rate home loans in India are linked to an external benchmark, and for many banks that benchmark is the repo rate itself. Under this system, the loan rate is the repo rate plus a fixed spread decided by the bank. When the repo rate changes, the loan rate changes too, usually at the next reset date mentioned in the loan agreement.
When the rate goes down, a borrower's bank will usually either reduce the monthly EMI or keep the EMI the same and shorten the remaining loan tenure. When the rate goes up, the reverse happens. Many banks adjust tenure by default, so borrowers who prefer a lower EMI may need to ask the bank for it.
Older loans linked to the MCLR or base rate respond more slowly, because those internal benchmarks are recalculated by the bank over time rather than moving directly with the repo rate.
Deposits move as well
Repo rate changes also tend to flow through to fixed deposit rates, though with a lag and not always by the same amount. Existing fixed deposits keep the rate locked in when they were opened; only new deposits and renewals are affected.
Things a borrower can check
- Which benchmark the loan is linked to (repo, MCLR or base rate).
- The reset frequency written in the loan agreement.
- Whether the bank adjusts EMI or tenure after a rate change, and how to request the other option.
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