How RBI Repo Rate Changes Affect Your Personal Loan Interest Rates

A Personal Loan is one of the most convenient and widely used types of loans in India for urgent expenses or other large financial needs. There are several factors influencing the EMI of a Personal Loan, such as the loan amount, tenure, and interest rate. Another key factor influencing the interest rate is the RBI repo rate. You might have come across this term in financial news whenever the Reserve Bank of India (RBI) announces changes.

In this blog, we will explain what the RBI repo rate is and how fluctuations in the repo rate can impact your Personal Loan interest rates, EMIs, and overall borrowing cost.

What is the Repo Rate?

The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks. This lending is done under a repurchase agreement (repo), where banks agree to repurchase the securities after a short period.

In other words, when banks face short-term funding gaps, they borrow from the RBI and pay interest on the borrowed amount; this interest is called the repo rate.

For example, if the repo rate is 6.5%, it means banks must pay 6.5% interest when borrowing from the RBI. Changes in the repo rate directly influence borrowing costs for banks, which can affect loan interest rates for customers.

How Repo Rate Changes Impact Personal Loan Interest Rates

Now that you know what the repo rate is, let's understand how the RBI repo rate changes impact your loan interest rates:

Floating Interest Rate Loans

If you have a floating interest rate loan, your EMIs may change whenever the repo rate is revised. When the RBI increases the repo rate, lending rates typically rise, which can lead to higher EMIs. Conversely, when the repo rate is cut, your EMIs may decrease. Or your loan tenure could be reduced if you continue paying the same EMI.

Fixed Rate Loans

If you have a fixed-rate loan, your EMIs generally do not change even if the RBI reduces the repo rate. The interest rate remains fixed for the entire loan tenure. So, you cannot benefit from lower rates unless you refinance or switch to a floating-rate loan.

Effect on Loan Value and Overall Cost

If the prevailing interest rates go up with an increase in the repo rate, your borrowing cost increases too. With a huge loan amount, even a fractional increase in interest rate can push the overall borrowing cost much higher.

Reverse Repo Rate and Its Function

Besides the repo rate, there is another important rate called the reverse repo rate. This is the rate at which the Reserve Bank of India (RBI) borrows funds from commercial banks.

When the RBI raises the reverse repo rate, it incentivises banks to park more funds with the central bank. Therefore, this system reduces the money supply in the economy. This mechanism also helps control inflation and stabilise economic growth.

Why Does the RBI Make Changes in the Repo Rate?

The RBI uses the repo rate to manage inflation, maintain liquidity in the economy, and support economic growth. The Monetary Policy Committee (MPC) reviews these rates every two months, assessing economic conditions to decide whether to increase or decrease them.

When inflation rises, the RBI raises the repo rate to make borrowing more expensive. This discourages excessive borrowing by individuals and businesses, thereby reducing the money supply in the market.

However, during periods of slow economic growth, the RBI may lower the repo rate or raise the reverse repo rate. This is done to encourage borrowing and spending. A reduction in the repo rate allows banks to cut lending rates on loans, boosting demand for Personal Loans.

How Does the Repo Rate Affect Banks and Borrowers?

Whenever the RBI changes the repo rate, it directly impacts how banks borrow funds and the cost of lending. Here’s how it works:

• Repo Rate Increase: When the RBI raises the repo rate, banks have to pay higher interest to borrow money from the central bank. To maintain their margins, banks typically increase the interest rates charged to customers on loans.

• Repo Rate Decrease: When the repo rate is lowered, banks pay less interest to the RBI. They can pass on the benefit by reducing lending rates for borrowers.

Why Repo Rate Changes Matter for You

The repo rate may sound like a technical financial term, but its impact reaches your wallet. Whether you’re planning to borrow for a new car or personal expenses, changes in the repo rate affect your total cost of borrowing.

• When the repo rate increases, borrowing becomes more expensive. You may have to pay higher EMIs or extend your loan tenure to manage the same loan amount.

• When the repo rate decreases, your borrowing costs drop, resulting in lower EMIs. This can help you achieve your financial goals sooner and with less stress.

To Conclude

The repo rate is one of the most powerful tools of the Reserve Bank of India for controlling the economy. Changes in the RBI repo rate affect banks, which in turn impact borrowers, influencing loan interest rates, EMIs, and loan tenures. When the repo rate rises, borrowing becomes more expensive, EMIs (Equated Monthly Instalments) increase, and economic activity may slow down. Conversely, when the repo rate falls, EMIs decrease, borrowing becomes cheaper, and spending and economic growth increase.

Understanding the effects of the repo rate can help you plan your Personal Loans, savings, and investments more effectively. This is because even a small RBI repo rate change can directly impact your loans and finances. Stay in control, apply for a Personal Loan with Poonawalla Fincorp today and manage your finances with ease.

Frequently Asked Questions

How quickly do banks update Personal Loan interest rates after an RBI repo rate change?

For floating-rate personal loans, banks usually adjust interest rates within a few months after an RBI repo rate change. The exact timing depends on the bank’s loan reset period and internal policies.

Why doesn’t my EMI change immediately after a repo rate increase?

Banks typically adjust your EMI or loan tenure only on your next reset date, not immediately after the RBI announces a rate change.

Does a higher repo rate always mean higher EMIs for borrowers?

In most cases, yes. However, some banks may absorb small increases temporarily to remain competitive.

What happens if the RBI cuts the repo rate, but my bank doesn’t reduce interest rates?

Some banks may delay passing on the benefit. In such cases, you can request a rate review or consider refinancing your loan with another lender.

Can repo rate changes influence my mutual fund returns?

Repo rate changes can affect debt mutual funds, especially those that invest in government securities, bonds, and fixed-income instruments.