Repo Rate and Your EMI: What Happens When the RBI Changes Rates
Most new floating-rate home loans are linked to the RBI repo rate. Here is how a change reaches your loan, and how to respond to a rise or a cut.
Whenever the Reserve Bank of India announces a change in the repo rate, headlines talk about EMIs going up or down. But what is the repo rate, how does a change actually reach your home loan, and what should you do about it? This guide explains the chain from the RBI’s decision to your monthly statement.
Key takeaways
- The repo rate is the rate at which the RBI lends to banks; it is the main lever of monetary policy.
- Most new floating-rate retail loans are linked to an external benchmark such as the repo rate, so changes pass through at the next reset.
- A 0.25% rise on a new ₹50 lakh, 20-year loan at 8.5% means either ₹794 more EMI or about 13 extra months.
What is the repo rate?
The repo rate is the interest rate at which the RBI lends short-term money to commercial banks. When the RBI raises it, borrowing becomes more expensive for banks, and they pass the higher cost on to customers. When it cuts the rate, loans become cheaper. The RBI’s Monetary Policy Committee reviews the rate several times a year, mainly to keep inflation in check while supporting growth.
How it reaches your loan
Since October 2019, banks have had to link new floating-rate retail loans — including home loans — to an external benchmark, and most choose the repo rate. Your rate is set as:
The spread depends on your credit profile and the lender, and stays fixed unless your credit risk changes. The benchmark part moves when the RBI changes the repo rate, at the reset frequency in your agreement (at least once every three months).
Older loans linked to MCLR or the base rate also respond, but more slowly and less directly. If you have one of these, it may be worth switching to a repo-linked rate — ask your lender about the conversion terms.
What a 0.25% rise does to a ₹50 lakh loan
Take a new ₹50 lakh, 20-year loan at 8.5% (EMI ₹43,391). If the rate rises to 8.75%, the lender can apply it in two ways:
- Higher EMI: about ₹44,186, ₹794 more each month, with the same end date. Over 20 years that is about ₹1.9 lakh more in payments.
- Longer tenure: the EMI stays the same but the loan runs about 13 months longer.
Many lenders extend the tenure first, because it does not change your monthly budget. Successive rises can stretch a loan by years without you noticing — check your statement after every rate change.
RBI guidelines require lenders to tell borrowers how a rate change affects their EMI or tenure, and to give them options such as choosing between a higher EMI and a longer tenure, or prepaying.
What to do when rates rise
- Check whether your tenure has been extended, and by how much.
- Consider accepting a higher EMI if you can afford it, to keep the original end date.
- Make a part payment to offset the increase — see reduce EMI or tenure after a prepayment.
What to do when rates fall
- Make sure the cut is passed on at the next reset.
- Keep your EMI unchanged if you can, to finish sooner and save the most — see how a 0.5% rate cut changes your loan.
- Compare your spread with what new borrowers are offered, and negotiate or consider a balance transfer.
Fixed-rate borrowers
If your loan has a truly fixed rate, repo rate changes do not affect your EMI during the fixed period. Read about the trade-offs in fixed vs floating home loan rates.
See the effect on your loan
Enter your outstanding balance, the new rate and remaining tenure in the Home Loan EMI Calculator to see your new EMI, or keep your EMI and see how the tenure changes using the Loan Repayment Calculator.
This article is for general information only and is not financial, tax or legal advice. Rates, rules and products change — check current terms with your lender or a qualified adviser. Disclaimer.