Explainer: What is the RBI's repo rate? Why do your EMIs rise when it goes up, and how do you get relief when it comes down?
The impact of changes in RBI interest rates is not limited to the banking system; it can directly affect the common man's pocket as well. The repo rate is particularly crucial for you if you have taken a home loan, car loan, or any other loan with a floating interest rate. Today, on October 7, 2026, the RBI raised the repo rate by 25 basis points (0.25%), bringing it to 5.50%. This marks the first hike since February 2023. Naturally, many people might be wondering what exactly the repo rate is, so let us understand it in detail.
What exactly is the Repo Rate?
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to banks for short periods. Banks borrow funds from the RBI when needed and pledge government securities as collateral in return. According to the RBI, the repo rate is its key policy rate, used to influence the money supply and credit conditions within the economy.
Why might your EMI increase if the Repo Rate rises?
When the RBI raises the repo rate, it can put pressure on the banks' cost of funds. Consequently, banks may increase interest rates on certain loans. This impact is particularly significant for floating-rate loans linked to external benchmarks, such as the repo rate.
Under RBI regulations, retail and MSME floating-rate loans offered by banks can be linked to external benchmarks, including the RBI's repo rate. The interest rates on such loans are subject to periodic resets, occurring at least once every three months.
What does a 25-basis-point hike mean?
100 basis points = 1 percent
Therefore, 25 basis points = 0.25 percent
For instance, if the interest rate on a loan rises by 0.25 percent following a 25 bps hike in the repo rate, the additional interest burden will depend on the loan amount and the remaining tenure.
For example, on a ₹50 lakh home loan with a 20-year tenure, a 0.25 percent rate hike could increase the EMI by approximately ₹800 per month. However, the actual impact will depend on the bank's new interest rate, the remaining loan tenure, and reset rules.
What happens if the repo rate falls?
The reverse can also occur. If the RBI cuts the repo rate, the cost of funds for banks may decrease. Consequently, banks might reduce loan interest rates, potentially lowering EMIs for floating-rate home, car, or other loans. However, it is not guaranteed that the customer will immediately receive the full benefit of every RBI rate cut; factors such as the bank's own costs, the loan's benchmark, and the reset cycle also play a crucial role.
A simple formula for the common person:
If the repo rate rises, bank funding costs may increase, making loans more expensive and potentially raising EMIs.
If the repo rate falls, bank funding costs may decrease, making loans cheaper and potentially lowering EMIs.
In essence, a single decision by the RBI can impact the cost of your home loan, car loan, and other borrowings. Therefore, whenever the MPC announces a decision, do not just look at the repo rate figure; also consider your loan's benchmark, interest rate, and reset cycle.
Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
