The repo rate is a key term you often hear in news related to the Reserve bank of India (RBI), inflation, and bank loans. Understanding it is crucial, especially if you have home loans, personal loans, or other EMIs.
1. What is Repo Rate?
The repo rate is the rate at which commercial banks borrow money from the RBI using government securities as collateral.
It is a tool used by the RBI to control inflation and money supply in the economy.
Increase in repo rate → borrowing becomes costlier for banks → banks may increase loan interest rates.
Decrease in repo rate → borrowing becomes cheaper for banks → banks may reduce interest rates for borrowers.
2. Repo Rate and Loan Interest Rates
Many banks link their loan products to the repo rate under the External Benchmark Lending Rate (EBLR) system.
Examples of loans affected:
Home loans
Personal loans
Auto loans
When the repo rate changes, banks adjust the EMI interest rates accordingly.
3. How Repo Rate Affects Your EMI Payments
Let’s assume:
You have a home loan of ₹30 lakh for 20 years
Interest rate is linked to repo rate + spread
Scenario 1: Repo Rate Hike
RBI increases repo rate by 0.25%
Bank increases your loan interest rate by 0.25%
EMI increases, meaning you pay more every month
Scenario 2: Repo Rate Cut
RBI decreases repo rate by 0.25%
Bank reduces your loan interest rate by 0.25%
EMI decreases, meaning you pay less every month
Even a small change in repo rate can save or cost thousands of rupees over the loan tenure.
4. Other Effects of Repo Rate Changes
Inflation Control: Higher repo rates can reduce spending and inflation.
Economic Growth: Lower repo rates encourage borrowing and investment.
Bank Deposits: Savings account interest rates may also change slightly.
5. Key Takeaways for Borrowers
Track RBI repo rate announcements, usually every 2 months
Loans linked to repo rate are flexible; you can benefit from rate cuts
Higher repo rate → higher EMIs → plan your budget accordingly
Consider loan prepayment or refinancing if repo rate cuts are significant
6. Conclusion
The repo rate is more than just an economic indicator—it directly impacts your EMI payments. By staying informed about RBI policy changes, borrowers can plan finances better and potentially save money on loan interest over time.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.
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