Repo rate explained: How RBI rate cuts and hikes affect your EMIs, savings, and investments

The RBI announces its monetary policy decisions at its bi-monthly Monetary Policy Committee (MPC) meetings, and one of the most closely watched decisions is the policy repo rate. It directly influences the interest rate you pay on home, car, and personal loans, the returns you earn on fixed deposits (FDs), and even the performance of your market investments.

Currently, the RBI has kept the policy repo rate at 5.25%, and the next monetary policy meeting is scheduled between June 3 and June 5, 2026. Here's a look at out how a repo rate cut or hike actually impacts your finances and investments.

What is the repo rate?

Repo rate is the rate at which the central bank (RBI) provides loans to the commercial banks. This means whenever your bank, let's say HDFC Bank, needs a fund, they would take a loan from the RBI at this repo rate.

If the HDFC Bank is taking a loan at a higher rate, then they will also lend you money at a higher rate. The higher the repo rate, the higher the interest you have to pay on the loan you take, and vice versa.

The RBI may consider increasing the repo rate when inflation rises and needs to be brought under control. Higher interest rates make borrowing more expensive, which helps reduce the flow of money in the economy and slows down demand.

On the other hand, the RBI cuts the repo rate when it wants to boost economic activity. Lower interest rates encourage borrowing and spending, increase liquidity in the economy, and support GDP growth.

How does a repo rate cut impact your EMIs, savings, and investments?

Here is an illustration of how a repo rate cut changes your EMIs, savings, and investments.

EMIs

Suppose you have a home loan of ₹50 lakh with a tenure of 20 years at a floating interest rate of 8.25%. At this rate, your monthly EMI will come to ₹42,603.

Now, if the RBI cuts the repo rate from 5.25% to 5% and your bank passes on the entire 0.25% reduction, your home loan interest rate could fall to 8%. As a result, your EMI would decrease to ₹41,822.

This means you would save ₹781 every month, or about ₹9,372 annually. Over the full loan tenure, the total savings could add up to ₹1.87 lakh, making home loans more affordable.

Fixed Deposits

Suppose you have an FD of ₹1 lakh of 5 years tenure at an interest rate of 7% per annum. At this rate, the investment would grow to approximately ₹1.41 lakh at maturity.

Now, if the RBI cuts the repo rate from 5.25% to 5%, banks may gradually reduce FD interest rates. If you start the new FD at 6.75%, the same ₹1 lakh investment would grow to ₹1.39 lakh. This means you would earn ₹1,728 less at maturity compared to the higher interest rate.

Investments

For equity funds and stocks, the repo rate cut does not have a direct visible impact. Generally, lower interest rates make borrowing cheaper for companies, which can improve business growth and profitability. As a result, investor sentiment often improves, and stocks or equity fund investments may rise.

For a long-duration debt mutual fund that holds government and corporate bonds, the repo rate cut is beneficial. When the RBI cuts the repo rate, newly issued bonds generally offer lower interest rates. As a result, the existing bonds in the fund's portfolio, which carry higher interest rates, become more valuable. This can lead to an increase in the fund's NAV and thereby the total returns.

How does a repo rate hike impact your EMIs, savings, and investments?

EMIs

Suppose you have a home loan of ₹50 lakh with a tenure of 20 years at a floating interest rate of 8.25%. At this rate, your monthly EMI would be ₹42,603.

Now, if the RBI hikes the repo rate from 5.25% to 5.5% and your bank passes on the entire 0.25% interest rate, your home loan interest rate will rise to 8.5%. As a result, your EMI would increase to ₹43,391.

This means you would pay an extra ₹788 every month, or about ₹9,456 annually. Over the full loan tenure, the extra payable amount adds up to ₹1.89 lakh, making home loans more expensive.

Fixed Deposits

Suppose you have an FD of ₹1 lakh of 5 years tenure at an interest rate of 7% per annum. At this rate, the investment would grow to approximately ₹1.41 lakh at maturity.

Now, if the RBI increases the repo rate from 5.25% to 5.5%, banks may gradually hike FD interest rates. If you start the new FD at 7.25%, the same ₹1 lakh investment would grow to ₹1.43 lakh. This means you will be able to earn ₹1,748 more at maturity.

Investments

For equity funds and stocks, the repo rate hike could have a negative impact. With higher borrowing costs, the corporate earnings could impact, and thereby the final returns.

For debt funds, newly issued bonds tend to offer higher interest rates when the repo rate rises. As a result, the NAV of debt funds holding lower interest rate bonds may decline, leading to lower overall returns.

Conclusion

A repo rate cut is generally positive for your EMIs, equity investments, and debt funds, while being less favorable for fixed deposits. On the other hand, a repo rate hike typically benefits FD investors but can increase EMIs and put pressure on equity and debt fund returns.

However, the actual impact depends on market conditions and how effectively banks transmit the RBI's rate changes to customers.

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