Repo Rate: The Reserve Bank of India (RBI) on Wednesday, August 6, kept the key policy repo rate unchanged at 5.5 per cent after a detailed assessment of the current economic and financial conditions. RBI Governor Sanjay Malhotra announced the Monetary Policy Committee (MPC) decision during a press briefing, confirming a unanimous vote to maintain the status quo.But what exactly is the repo rate, and how does it affect your loan EMI (Equated Monthly Installment)? Here's a detailed explanation.What is repo rate?The repo rate is the interest rate at which the RBI lends money to commercial banks (like SBI, HDFC Bank, ICICI Bank, etc.) against government securities when they are short on funds.Think of it as the cost of borrowing for banks. If the repo rate is high, borrowing becomes expensive for banks. If it is low, borrowing becomes cheaper. This rate is one of the most important tools used by the central bank to manage liquidity, inflation, and overall economic activity.Why does RBI change the repo rate?The RBI tweaks the repo rate mainly to control inflation and support economic growth:If inflation is high, RBI may increase the repo rate to discourage borrowing, reduce money supply, and cool down price rises.If the economy is slowing, RBI may cut the repo rate to make loans cheaper, encouraging consumers and businesses to borrow, invest, and spend.At present, inflation in India has moderated, but global uncertainties and domestic growth concerns have prompted the RBI to maintain a cautious stance.How does repo rate impact your loan EMI?The repo rate has a direct impact on the interest rates charged by banks on loans like home loans, car loans, and personal loans, especially those that are linked to external benchmarks like the RBI repo rate.Here’s how it works:When RBI raises the repo rate, banks’ borrowing cost goes up.To protect their profit margins, banks usually increase the interest rates on loans they give to customers.As a result, borrowers pay more EMI if they have floating rate loans.Conversely, when the repo rate is cut, banks may reduce loan interest rates, and EMIs become cheaper.So, if you have a home loan linked to the repo rate, any change in this rate can directly impact your EMI.Let’s say you took a home loan of Rs 30 lakh for 20 years at an interest rate of 8%. Your EMI would be around Rs 25,093.If the interest rate increases to 8.5%, your EMI would rise to around Rs 26,035 — that’s almost Rs 942 more every month.Over the loan tenure, this adds up to a significant extra burden. That's why even a 0.25% change in the repo rate can impact household budgets.What should borrowers do?- If you have a floating rate loan, it’s important to track repo rate movements. You can also:- Talk to your bank about refinancing if better interest rates are available.- Consider part-prepayment of loans to reduce EMI or tenure.- Maintain a strong credit score to negotiate better terms.
What is repo rate and how it affects loan EMI? Explained
