The Starting Point: What is the Repo Rate?
Think of the repo rate as the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. It is the central bank's primary tool for controlling money supply and fighting inflation. When the RBI wants to make borrowing cheaper
to encourage economic activity, it lowers the repo rate. Conversely, to curb inflation and reduce the amount of money in circulation, it increases the repo rate, making it more expensive for banks to borrow.
The Decision-Makers: The Monetary Policy Committee
The decision to change the repo rate isn't arbitrary. It's made by the RBI's Monetary Policy Committee (MPC), a six-member body that meets several times a year. The MPC's main goal is to maintain price stability while keeping in mind the objective of growth. They analyse inflation data, economic growth projections, and global financial trends before voting on whether to increase, decrease, or hold the repo rate steady. As of late 2026, the repo rate has seen adjustments aimed at balancing these economic pressures.
The First Ripple: Banks' Cost of Funds Changes
When the RBI changes the repo rate, the first and most direct impact is on the cost of funds for commercial banks like SBI, HDFC Bank, or ICICI Bank. If the repo rate goes down, banks can borrow from the RBI at a cheaper rate. This reduces their operational costs. If the repo rate goes up, their cost of borrowing money increases. This change in cost is the critical first step in the transmission process that eventually reaches the end consumer.
The Direct Link: External Benchmark Lending Rate (EBLR)
For years, the transmission of rate changes from the RBI to customers was slow and inconsistent. To fix this, the RBI mandated a new system in October 2019 called the External Benchmark Lending Rate (EBLR). Under this system, banks must link their new floating rate loans for retail customers and small businesses directly to an external benchmark. Most banks have chosen the RBI's repo rate as their benchmark. This creates a direct and transparent connection. Your loan's interest rate is now simply the Repo Rate plus a 'spread' or margin that the bank charges.
The Final Step: Your EMI Gets Recalculated
Because your floating rate loan is linked to the repo rate via the EBLR, any change announced by the MPC must be passed on to you. RBI rules mandate that banks must reset the interest rates at least once every three months in line with the benchmark. When the repo rate changes, your loan's interest rate is adjusted. For example, if the repo rate is cut by 0.25%, your loan's interest rate will also fall by 0.25% at the next reset date. This change can manifest in two ways: either your Equated Monthly Instalment (EMI) amount decreases, or your EMI remains the same but your loan tenure (the total repayment period) gets shorter. The specific method depends on your bank's policy.
Who is Affected and Who is Not?
This direct transmission primarily affects borrowers with 'floating rate' loans linked to an external benchmark, which includes most new home loans, auto loans, and personal loans taken after October 2019. If you have an older loan linked to previous systems like the MCLR or Base Rate, the transmission is slower and less direct. And if you have a 'fixed rate' loan, your interest rate and EMI will remain unchanged for the duration of the fixed period, regardless of what the RBI does with the repo rate.
