The Reserve Bank of India's Monetary Policy Committee (MPC) recently concluded its bi-monthly meeting, and the decision has direct implications for millions of borrowers across the country. Whether you have an existing loan or are planning to apply for one, understanding how the repo rate affects your finances is essential.
What Is the Repo Rate and Why Does It Matter?
The repo rate is the interest rate at which the RBI lends money to commercial banks. When the RBI changes the repo rate, banks adjust their lending rates accordingly. Since October 2019, all new floating rate loans in India are mandatorily linked to an external benchmark, and most banks use the RBI repo rate as that benchmark. This means any change in the repo rate is passed on to borrowers relatively quickly.
How a Repo Rate Cut Affects Your EMI
When the RBI reduces the repo rate, banks lower their external benchmark lending rates (EBLR), which reduces the interest rate on your floating rate loan. However, the impact varies based on how your bank implements the change:
- Reduced EMI: Some banks reduce your monthly EMI while keeping the tenure constant. A 25 basis point cut on a Rs 50 lakh home loan at 8.5% over 20 years can reduce your EMI by approximately Rs 750 per month.
- Reduced tenure: Other banks keep the EMI constant but reduce the loan tenure, which means you repay the loan faster and save more on total interest paid.
- Combination approach: A few lenders offer a mix of both reduced EMI and reduced tenure.
Impact on Different Loan Types
Not all loans are affected equally by repo rate changes. Here is a breakdown:
- Home loans: Maximum impact since these are long-tenure floating rate loans. Even a small rate reduction can save lakhs over the full tenure.
- Personal loans: Many personal loans are at fixed rates, so existing borrowers may not benefit immediately. New applicants, however, may get lower rates.
- Car and vehicle loans: Similar to personal loans, many vehicle loans are offered at fixed rates. Check with your lender whether your loan is linked to the repo rate.
- Business loans: MSME and business loans linked to EBLR will see rate reductions, benefiting small business owners with existing floating rate loans.
What Should Borrowers Do Now?
If you have an existing floating rate loan, check your bank's website or app to confirm that the rate reduction has been passed on to your account. If your bank has not adjusted your rate within the mandated timeframe, contact your branch or file a complaint with the banking ombudsman. For those considering a new loan, this is a favourable time to lock in competitive rates. Use TatvaMoney's EMI calculator to see how the latest rate change affects your monthly payments and compare offers from multiple lenders to ensure you are getting the best deal available in the market.