How Interest Rate Changes Reach Your EMI

How a change in the Reserve Bank of India's repo rate passes through to the interest rate and monthly instalments on home and other loans.

When the Reserve Bank of India changes its repo rate, the news is often followed by headlines about whether EMIs will rise or fall. What is the connection?

What is an EMI?

An EMI, or equated monthly instalment, is the fixed monthly payment a borrower makes on a loan. Each EMI covers part of the interest and part of the original loan amount.

Floating rate loans

Most home loans in India have floating interest rates, which change over time. Since October 2019, the RBI has required banks to link new floating rate loans to individuals and small businesses to an external benchmark, most commonly the repo rate. This means when the repo rate changes, the loan rate changes too, usually within a few months.

How the change shows up

When a loan’s interest rate changes, banks usually either:

Change the EMI, keeping the loan length the same, or
Change the loan tenure, keeping the EMI the same but extending or shortening how long you pay.

Many banks by default extend the tenure when rates rise. In 2023, the RBI asked banks to give borrowers clear choices and information when rates change.

A rate rise on a home loan

A family has a home loan of 40 lakh rupees for 20 years at 7 percent, with an EMI of about 31,000 rupees. If the rate rises to 9 percent, the EMI for the same period would rise to about 36,000 rupees. Alternatively, the bank might keep the EMI and extend the loan by many years. Either way, the family pays more interest overall.

Fixed rate loans

Some loans have fixed rates, which do not change with the repo rate. They offer certainty but may start at higher rates.

Why the RBI changes rates

The RBI raises rates to fight inflation and lowers them to support growth. Changes in EMIs are one of the main ways its decisions reach households, influencing how much people borrow and spend.

Thinking the EMI never changes on a floating rate loan

With floating rate loans, rate changes can alter either the EMI or the loan length. Checking statements and understanding which option the bank uses helps borrowers plan and avoid surprises.

Key takeaways

An EMI is the fixed monthly payment on a loan.
Since 2019, most new floating rate retail loans in India are linked to an external benchmark like the repo rate.
Rate changes alter either the EMI or the loan tenure.
RBI rate changes reach households mainly through loan costs.