The Reserve Bank of India (RBI) has cut repo rates several times in recent years to stimulate credit growth and lower borrowing costs. Yet, many borrowers are left wondering: “If the repo rate is down, why isn’t my EMI reducing?” The answer lies in how loan pricing works, the difference between repo-linked and MCLR-linked loans, and the way banks pass on rate cuts to customers.
Understanding the Repo Rate
The repo rate is the rate at which RBI lends short-term funds to banks. A cut in this rate is intended to:
Lower borrowing costs for banks
Encourage them to lend more
Ultimately reduce loan interest rates for consumers and businesses
However, the actual benefit for borrowers depends on whether their loans are linked directly to the repo rate or not.
Why EMIs Aren’t Dropping as Expected
1. MCLR vs. Repo-Linked Loans
Many older loans are linked to the MCLR (Marginal Cost of Funds-Based Lending Rate), not directly to the repo rate.
Repo-linked loans pass on rate cuts faster, but MCLR-linked loans adjust more slowly.
2. Banks’ Spread & Charges
Even if the repo rate falls, banks add a spread to cover operational costs, risk, and profit. This margin doesn’t automatically shrink with repo cuts.
3. Transmission Delays
It often takes months for banks to revise EMIs, especially for loans tied to older benchmarks. This lag delays relief for borrowers.
4. Reset Dates on Loans
Many floating-rate loans have reset dates (e.g., every 6 or 12 months). Rate cuts are reflected only when that reset date arrives.
5. Liquidity & Bank Strategy
If banks already have surplus liquidity, they may not rush to cut rates further—even if RBI lowers repo.
What Borrowers Can Do
Check Your Loan Type → Find out if your loan is MCLR-linked or repo-linked. Repo-linked loans adjust faster.
Ask for a Switch → RBI guidelines allow borrowers to shift from MCLR/older benchmarks to repo-linked loans, often for a nominal fee.
Negotiate with Banks → Loyal, low-risk borrowers can sometimes request better spreads.
Compare & Refinance → Switching to another bank offering lower repo-linked rates could save money in the long run.
FAQs
Q1: Do repo rate cuts always lower EMIs?
A: Not always. The impact depends on your loan type and the bank’s transmission of rates.
Q2: Should I switch to a repo-linked loan?
A: Yes, if you want quicker transmission of RBI rate cuts. But check costs and terms before switching.
Q3: Why do banks delay passing on cuts?
A: Because of reset cycles, liquidity conditions, and their own pricing strategies.
Q4: Can fixed-rate loans benefit from repo cuts?
A: No, fixed-rate loans remain unchanged until maturity or reset clauses.
Conclusion
Repo rate cuts are designed to make borrowing cheaper, but the actual impact on your EMI depends on multiple factors—loan type, spreads, reset cycles, and bank policies. Borrowers who proactively switch to repo-linked loans or refinance smartly can maximize savings and truly benefit from RBI’s monetary easing.
Published on : 6th September
Published by : SMITA
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