If you are planning to buy a bike on EMI, take a home loan, pay college fees through a loan or borrow money to start a business, the Reserve Bank of India’s latest decision matters to you. The RBI has raised the repo rate after three years. When this rate goes up, borrowing can become more expensive for banks and, eventually, for you. But why did the RBI increase the rate? Will your existing EMI increase? What happens to an education or business loan? And what if you do not have a loan at all? Let us understand. What is the repo rate? Why did the RBI raise it? Think of the repo rate as the interest rate at which the RBI lends short-term money to banks. So, when the RBI changes this rate, it can affect how much it costs banks to borrow money. This can then affect the interest rates banks charge on some loans. On 7 October, the RBI raised the repo rate by 25 basis points, or 0.25 percentage points, to 5.50%. This was its first rate hike since February 2023. Why did it do this? But why make loans more expensive on purpose? Suppose loans are cheap. More people may borrow and spend money on homes, vehicles and businesses. If demand rises too much, prices can also rise. By raising interest rates, the RBI can make borrowing a little less attractive. This can reduce some spending pressure and help control inflation. But how does a decision taken at the RBI reach your pocket? Understand the journey through the following graphic. So, the repo rate may sound like a banking decision. But the real question is: when does this change reach your EMI? How can RBI’s rate hike affect your loan? First, remember: the RBI does not directly change your EMI. Your bank or lender changes the interest rate according to your loan’s terms. This is where fixed and floating rates matter. Many floating-rate loans are linked to an external benchmark, which can include the repo rate. Suppose your family has a floating-rate home loan in Bhopal. If the bank changes its rate after the RBI decision, the EMI may rise. But this does not mean your EMI will increase the very next day. It depends on the loan, its benchmark and when the rate is reset. So, if your family already has a loan, ask: How much more will you pay for a home, car or bike loan? Suppose your lender passes on the full 0.25 percentage-point increase: The actual impact depends on your bank, interest rate, outstanding amount, remaining tenure and reset date. The bank may also keep the EMI similar but increase the loan tenure. These are only examples. Different borrowers will feel the change differently. So, where else can borrowing become important? Understand through the following graphic. And one category matters especially to young Indians planning their future: education loans. What about education loans and loans for studying abroad? Imagine a student from Bikaner gets admission to a university in the UK. Her fees, travel and living expenses cost around ₹30 lakh, so her family takes an education loan from an Indian bank. Suppose the loan has a floating interest rate. If the bank raises the rate after the RBI hike, the interest charged on the loan can increase. But the student may not see a higher EMI immediately. Education loans often have a moratorium period. This gives the student some time before regular repayment begins. But it does not necessarily mean interest stops. Depending on the loan terms, interest can continue to build up. So, when repayment begins, the student could face: For a ₹20–30 lakh loan, even a small rate change can matter because the loan is large and may run for several years. But the repo-rate hike does not automatically make every education loan costlier by 0.25 percentage points. The actual impact depends on the bank and the loan terms. What if you want a loan to start a business? Imagine a young person in Ujjain wants to open a café. He has ₹5 lakh of his own money but needs another ₹10 lakh, so he takes a business loan. If the loan has a floating interest rate and the rate rises, his repayment may also rise. That matters because he already has to pay for: If more money goes to the bank, less may be left to run or expand the business. The basic chain is: Higher repo rate → loan rate may rise → borrowing becomes costlier → more money may go towards repayment. But not every business loan will immediately become costlier. It depends on the type of loan, its benchmark and when the rate is reset. What if you do not have a loan? You may be thinking: ‘I am 19 or 20. I don’t have an EMI. Why should I care?’ You can still feel the effect indirectly. If borrowing becomes more expensive, people may postpone buying cars or homes. Businesses may delay expansion or buying new equipment. This can affect spending and investment across the economy. Graphics: M Ajit Kumar, Anas Shakir Post navigation Banks raise lending rates faster when RBI hikes repo rate:Home loan interests reduce at slower speed on repo cut — why?
