If you are paying a home loan, you may have noticed that your EMI (Equated Monthly Installment) sometimes goes up or down even if you haven’t changed anything. The main reason behind this is the RBI repo rate. Understanding how repo rate changes affect your EMI can help you plan your finances better.
What is the Repo Rate?
The repo rate is the rate at which the Reserve Bank of India (RBI) lends short-term money to commercial banks. When banks borrow funds from RBI, they pay this interest. Since repo rate directly impacts the cost of funds for banks, any change in it also influences the interest rates on loans and deposits.
How Does Repo Rate Affect Home Loan EMIs?
Most home loans today are linked to the RBI’s External Benchmark Lending Rate (EBLR) or Repo Linked Lending Rate (RLLR). This means whenever RBI changes the repo rate, banks pass on the effect to borrowers.
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When Repo Rate Increases:
Home loan interest rates rise, leading to higher EMIs or extended loan tenure. -
When Repo Rate Decreases:
Banks reduce home loan interest rates, helping borrowers save money by lowering EMIs or shortening repayment periods.
Example of Repo Rate Impact
Suppose you have a home loan of ₹50 lakh for 20 years at 8% interest.
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EMI ≈ ₹41,822 per month.
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If RBI increases the repo rate by 0.50% and banks pass it on, your new interest rate becomes 8.5%.
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New EMI ≈ ₹43,391 per month.
This means you’ll pay an extra ₹1,500+ every month, and over time, lakhs more in interest.
Why Does RBI Change the Repo Rate?
The RBI adjusts repo rates mainly to balance inflation and economic growth:
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To Control Inflation: When inflation rises, RBI increases the repo rate. Borrowing becomes costlier, reducing spending and demand.
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To Boost Growth: When the economy slows down, RBI cuts repo rates to encourage borrowing and investment.
What Should Borrowers Do?
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Choose Floating Rates Wisely: Floating-rate loans are directly impacted by repo rate changes, but they usually offer lower initial rates compared to fixed loans.
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Prepay During Low Rates: When repo rates fall, use the savings to make prepayments. This reduces your outstanding principal faster.
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Monitor RBI Announcements: Keep track of RBI’s bi-monthly monetary policy updates to anticipate EMI changes.
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Balance Transfer Option: If your bank doesn’t reduce rates quickly, consider switching your loan to another lender offering better terms.
RBI repo rate changes directly affect your home loan EMI, especially if you are on a floating interest rate. An increase can raise your monthly outgo, while a cut can help you save. By staying informed and planning ahead, you can manage your loan smartly and reduce your overall interest burden.