What is the RBI Repo Rate and How Does It Affect Home Loan Floating Interest Rates?
The RBI's repo rate is the policy interest rate at which the Reserve Bank of India lends short-term funds to banks. When it goes up or down, most home loans on a floating rate move in the same direction, typically within the next reset cycle, because they are benchmarked to the repo rate plus a fixed spread.
How Floating-Rate Loans Are Priced
In practice, a floating-rate home loan is usually priced as:
Loan rate = Repo rate + Bank's spread
The repo-linked component adjusts when the RBI changes the repo rate, while the spread remains broadly constant unless your credit profile or loan terms change.
Why the Repo Rate Matters
The repo rate is the RBI's primary tool to manage inflation and liquidity. When inflation is high, the RBI may raise the repo rate to make borrowing costlier and cool demand. When growth needs support, it may cut the rate to lower borrowing costs.
Most new floating-rate retail loans since October 2019 are linked to an external benchmark such as the RBI repo rate (often called RLLR: Repo-Linked Lending Rate). This framework improves transparency and speeds up 'monetary transmission,' so your rate adjusts faster after policy moves.
How Changes Transmit to Your Home Loan
- RBI announces a repo rate change at an MPC meeting
- Your bank updates its external benchmark-linked rate (for repo-linked loans, this is virtually automatic)
- Your loan rate changes on the next scheduled reset date (commonly every 3 months for external benchmark-linked loans)
- Your EMI system adjusts in one of two ways:
- Increase/decrease the EMI while keeping the tenure the same, or
- Keep the EMI the same but change the tenure (extend when rates rise; shorten when rates fall)
Key Terms to Know
- Repo rate: The RBI's policy rate for short-term lending to banks
- External benchmark: A transparent reference rate (e.g., the repo rate) that your floating loan is tied to
- Spread/margin: The fixed component over the benchmark reflecting your credit risk, operational costs, and product features
- Reset frequency: How often your loan rate is reviewed and adjusted (commonly quarterly for repo-linked loans)
- Transmission lag: The time from the RBI's decision to when your EMI/tenure actually changes
Worked Examples
Example 1: If your loan is priced at repo rate + 2.00% and the repo rate rises by 0.50%, your loan rate rises by 0.50% (from 8.50% to 9.00%) at your next reset. On a ₹50 lakh loan for 20 years, that can increase the EMI by roughly ₹1,000–₹1,300 per month, or extend the tenure if the EMI is kept constant.
Example 2: If the repo rate falls by 0.25%, the same loan drops by 0.25% at reset. You may see the EMI fall by ~₹500–₹700 per month on a ₹50 lakh, 20-year loan, or your tenure may shorten.
Floating vs Fixed: What Changes When the Repo Moves?
| Feature | Floating-rate home loan | Fixed-rate home loan |
|---|---|---|
| Benchmark | External benchmark (often the repo rate) | None (fixed for the agreed period) |
| Response to repo changes | Direct and relatively quick (at reset) | No change during the fixed period |
| EMI/tenure variability | EMI and/or tenure can change | Stable during fixed term |
| Typical starting rate | Usually lower than fixed | Usually higher than floating |
What If Your Loan Is Not Repo-Linked?
- MCLR-linked loans: Older floating loans may be tied to MCLR (Marginal Cost of Funds-based Lending Rate). Transmission to MCLR is slower and depends on banks' cost of funds and internal resets (often 6–12 months).
- Base rate/BPLR: Legacy loans transmit very slowly. Consider switching to an external benchmark or refinancing.
How to Manage Your Floating-Rate Home Loan Through Cycles
- Track the benchmark: Monitor the repo rate and your loan's reset dates to anticipate changes
- Prioritize prepayments when rates rise: Even small, regular prepayments toward principal can offset higher interest costs
- Consider increasing EMI, not just tenure: Raising EMI modestly during high-rate periods reduces total interest outgo
- Review your spread: If your effective rate looks high versus peers, ask your lender for a spread review or consider a balance transfer
- Choose the right structure: If you value stability, a fixed-rate may make sense; if you can tolerate variability for potentially lower lifetime cost, stick with floating
- Maintain a strong credit profile: Better credit scores and lower loan-to-value ratios can help you qualify for lower spreads
FAQs
Does every repo move change my EMI immediately?
Not immediately. The change typically shows up on your next reset date. Between the policy announcement and reset, your rate usually stays the same.
Can a lender delay passing on repo cuts?
With external benchmark-linked loans, cuts and hikes pass through more predictably at reset. Administrative delays can occur, but arbitrary withholding is limited by the transparent benchmark framework.
Will my spread go up if the repo rate goes up?
No. The spread and the benchmark are separate. The benchmark moves with policy; the spread is meant to be stable unless your risk or contract terms change.
Should I switch from MCLR/base rate to repo-linked?
If you want faster, more transparent transmission (up or down), yes. Compare the all-in rate (benchmark + spread), reset terms, fees, and your remaining tenure before deciding.
Practical Checklist
- Know your benchmark: Is your loan tied to the repo rate, MCLR, or something else?
- Find your reset date and frequency: Monthly or quarterly is common for repo-linked loans
- Compare your effective rate: Benchmark + spread versus market offers
- Decide your adjustment preference: EMI change, tenure change, or a mix
- Use prepayments wisely: Target principal early, especially after rate hikes
See How Repo Rate Affects Your Loan
Use our simulator to model different repo rate scenarios and see the impact on your EMI and total interest.
Try the Repo Rate Simulator