- Erigo India
- 21-Apr-2025
- Economy
Repo Rate and Loans: What You Need to Know
Table of Content
Understand the Repo Rate and Its Impact on Loan EMIs
Discover the connection between low repo and low loan interest rates
Repo rate on the rise? Re-evaluate your loan strategy
Which is better during Repo rate fluctuations? Fixed Or Floating interest rates
The repo rate also affects your savings and investments.
Understand the Repo Rate and Its Impact on Loans EMIs
When you get a loan for personal use, car or home, your lender determines the interest rate. But many other economic factors influence the interest rate including the repo rate.
Repo rate (repurchase rate) is the interest rate offered by RBI (Reserve Bank of India) to commercial banks while lending money to meet the shortfall in funds.
If you are thinking about how this rate impacts your investments and monthly instalments, this blog will help you understand everything in detail.
Repo Rate & Home Loan Instalments
When the repo rate is increased or decreased by RBI, it influences the costs for all the banks. It further influences the interest rates offered to customers on deposits and loans.
Now, how does that affect your home loan EMI? Let check out
Increase in Repo Rate
Well, to borrow money from RBI, banks need to pay a high rate of interest. This makes them hike the interest rates on different loans. So, the borrower needs to pay higher instalments.
Decrease in Repo Rate
Banks get money from RBI at a lower interest. It means lower interest rates offered by banks to their customers. So, this directly reduces your EMIs against loans if you have opted for a loan with floating rates. Not only banks but many other factors are responsible for decrease in repo rate.
Currently, if you are paying a home loan with a floating interest rate, an increase in the repo rate can increase your EMIs. Similarly, a decrease in repo rate can offer affordable homeownership for many.
Discover the connection between Low Repo and Low Loan Interest Rates.
Lower repo rate = lower loan interest rates?
The common assumption is that a lower repo rate leads to lower interest rates for all loan types. While this is ideally correct, the extent to which banks pass these benefits to the borrowers depends on multiple factors.
Bank’s Cost of Funds
If the banks currently have funds available at a higher repo rate, then they may not decrease the lending rates immediately.
Type of Loan
The rate cuts in repo rate affect floating-rate loans considerably, whereas fixed-rate loans remain unchanged.
Passing on Rate Cuts
Passing on the repo rate cuts benefits immediately to the consumers, is not something that all banks would do. Some banks will take time while others may continue to offer higher rates considering business aspects.
Creditworthiness of Borrowers
Your loan’s rate of interest also depends on your financial profile and credit score even if the repo rates drop.
Repo rate on the rise? Re-evaluate your loan strategy.
Borrowers need to re-consider their loan plans when RBI decides to increase the repo rate. It helps them reduce their financial burden. Let us find out what you can do:
Think about prepaying a loan
At present, if you have more funds, think about prepaying a section of your loan. It will reduce the interest burden.
Refinance to a Lower Interest Rate
If you are paying high interest for your existing loan, consider refinancing it. Choose another lender who can offer better interest rates.
Go for a Fixed-Rate Loan
If you think rates are going to increase further, switch to a fixed-rate loan to avoid future hikes.
Negotiate with the Bank
If you have a good repayment history, you can negotiate with the bank to get lower rates.
Make sure you keep a check on repo rate changes to make informed decisions in advance for your loans & instalments.
Which is better during Repo rate fluctuations? Fixed Or Floating interest rates
The most crucial decision while taking for a loan is picking between floating and fixed interest rates. Here, the repo rate plays a vital role in deciding.
Fixed Interest Rate
The rate of interest will remain the same throughout the entire loan period.
Ideal choice when repo rates go down and are expected to rise.
You can predict your EMIs and get financial stability. Initially, it can be more expensive than floating rates.
Floating Interest Rate
Based on changing repo rates and market conditions the interest rate varies.
Ideal when repo rates shoot up and are expected to reduce.
The overall interest expenses can be lower, but the EMIs will continue to change.
Which one should you choose?
If you want stability and a fixed EMI repayment amount, a fixed-rate loan is the right choice.
If you wish to reap the benefits of a drop in interest rates and can handle fluctuations, then go for a floating-rate loan.
________________________________________________________
The Repo Rate also affects your Savings and Investments.
Many of us think that repo rate changes are linked to loans only. But it affects your investments and savings too.
Impact on Savings
With the increase in repo rates, banks increase deposit rates to gain more funds. It means they offer higher returns on your FDs(fixed deposits) and recurring deposits.
With the decrease in repo rates, banks reduce the interest rates on your deposits which reduces the returns on your savings.
So, if you are dependent on fixed deposits or other bank deposits, check on repo rate fluctuations to adjust your savings plan.
Impact on Investments
Bonds & Debt Funds: Low repo rates result in lower outcomes on new bonds. But it increases the value of your existing bonds. When the interest rates are lower, Debt mutual funds perform better.
Stock Market: Well, lower repo rates uplift the stock market. This is because borrowing becomes affordable and companies can grow easily. On the contrary, a hike in the repo rate can affect stock prices and slow down overall economic activities.
Real Estate: Home loans get cheaper when repo rates fall. This increases the demand for real estate. Higher repo rates can bring down property sales because borrowing gets expensive.
Final Thoughts
The repo rate is a robust economic tool that impacts not only loan EMIs but also your investments and savings. It is important to understand its influence to make the right financial decisions. Whether you wish to take a loan, refinance the current one or plan your investments, keep a check on the repo rates.
Stay updated with RBI announcements and consult the financial experts when required. You can reduce financial risks and benefit from repo rate fluctuations if you plan your finances smartly.