Repo rate explained: how an RBI decision reaches your home-loan EMI

The repo rate is the interest rate at which the Reserve Bank of India lends short-term money to banks. When it changes, borrowing becomes cheaper or costlier across the economy — but not on the same day for everyone.

Who decides it

A six-member Monetary Policy Committee sets the rate: three members from the RBI, including the Governor, who chairs it, and three external members appointed by the government. It must meet at least four times a year and in practice meets about every two months. Decisions are by majority, and the Governor has a casting vote in a tie.

Why it moves

The committee’s main job is to keep retail inflation close to the target set by the government, within a tolerance band. When prices rise too fast it raises the repo rate to cool demand; when inflation is under control and growth is weak, it can cut.

From the RBI to your EMI

Since October 2019, banks have had to link most new floating-rate loans to individuals and small businesses to an external benchmark, usually the repo rate. Such loans must be reset at least once every three months, so a cut or a hike reaches borrowers within a few months. Older loans linked to a bank’s internal benchmark, such as the MCLR, adjust more slowly.

A higher EMI, or a longer loan?

When rates rise, banks often keep the EMI unchanged and stretch the tenure instead. That feels painless but can add years of interest. Under RBI rules, banks must tell you about such changes and offer you the choice of a higher EMI, a longer tenure or a mix of both — check your loan statement after every rate change.

And your fixed deposit

Deposit rates usually follow the repo rate, but with a lag and not always fully. That is why savers watch policy announcements too: the rate offered on a new fixed deposit can change within weeks of a decision.

Follow every policy decision on our Economy & RBI page.