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What Is Repo Rate and How Does It Affect Your EMI?

By IndiaAsk Editorial Team · 2026-01-20 · 4 min read · Economy

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Key Takeaways

• The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks for the short term.
• It is decided by the Reserve Bank's Monetary Policy Committee, based on inflation and economic growth.
• When the repo rate rises, borrowing becomes costlier for banks, and new loans tend to become more expensive.
• When it falls, your EMI does not always fall immediately — banks review rates under their own policies, so there can be a time lag.
• The reverse repo rate is the rate at which the Reserve Bank borrows money from banks with surplus cash.

The repo rate is the interest rate at which the Reserve Bank of India lends money to commercial banks for the short term. When banks suddenly need cash, they borrow from the Reserve Bank by pledging government securities, and later buy those securities back. The rate charged in this transaction is called the repo rate. It is one of the main tools of monetary policy, and it affects the loans, savings and inflation experienced by ordinary people.

Who Decides the Repo Rate

The repo rate is decided by the Monetary Policy Committee of the Reserve Bank. This committee meets at regular intervals and assesses the state of the economy — how high inflation is, how economic growth is performing, and what global conditions indicate. If inflation is rising too fast, the committee may decide to raise the repo rate so that borrowing becomes more expensive for banks and the flow of money in the economy slows down somewhat. On the other hand, if economic growth is slowing, the committee may cut the repo rate to make borrowing cheaper, so that people and companies borrow more and spend more.

The most direct effect on ordinary people is on the EMI of home loans, car loans and personal loans. When the repo rate rises, the cost of borrowing for banks themselves increases. Banks gradually pass this increased cost on to their customers, so new loans become more expensive. Loans that are linked to an external benchmark tied to the repo rate may change relatively quickly. Loans based on older internal rates may change more slowly, because banks review their rates according to their own policies.

When the Repo Rate Falls

When the repo rate falls, the situation reverses. Banks get cheaper funds, which increases the chance that interest rates on new loans will fall. However, it is important to remember that your EMI does not always fall immediately when the repo rate falls. Banks decide their lending rates after assessing their deposit rates, operating costs and risk. There can therefore be a time lag between a change in the repo rate and a change in your EMI, and the full benefit of a cut does not always reach the customer.

It is also useful to understand the reverse repo rate alongside the repo rate. The reverse repo rate is the rate at which the Reserve Bank borrows money from banks — that is, when banks have surplus cash, they can deposit it with the Reserve Bank and earn interest. The gap between these two rates influences how banks behave and determines the overall effect of monetary policy on the economy.

Savers Feel It Too

Savers are also affected by the repo rate. When the repo rate rises, deposit rates offered by banks are likely to rise, which can increase the interest earned on fixed deposits and other savings products. When the repo rate falls, deposit rates may also fall. The interests of borrowers and savers therefore often move in opposite directions, and monetary policy has to strike a balance between the two groups.

In short, the repo rate is not just a technical number. It is an important tool that shapes the direction of the country's economy, helps control inflation, supports growth and maintains financial stability. Keeping an eye on the direction of the repo rate is a sensible step when planning your EMI and savings, but it is also worth remembering that your actual interest rate depends on your bank's policy, your credit history and the terms of your loan. A change in the repo rate is a signal, not a guarantee, and the final rate you pay is decided by a combination of these factors. Before taking a large loan, it is therefore worth comparing offers from more than one bank, checking whether the rate is fixed or floating, and reading the fine print on processing fees and prepayment charges.

Frequently Asked Questions (FAQ)

Why does EMI rise when the repo rate rises?

Because borrowing from the Reserve Bank becomes more expensive for banks, and they pass part of that cost into the interest rates charged to customers.

Does EMI fall immediately when the repo rate falls?

Not always. Banks review their rates under their own policies, so the change can take time and the full benefit may not always reach customers.

Who decides the repo rate?

The Monetary Policy Committee of the Reserve Bank of India, based on inflation and economic growth data.

What is the reverse repo rate?

It is the rate at which the Reserve Bank borrows money from banks — banks deposit surplus cash with the Reserve Bank and earn interest on it.

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