Story so far: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday (October 7, 2026) voted unanimously to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 bps to 5.50%. Consequently, the standing deposit facility (SDF) rate stands adjusted at 5.25% and the marginal standing facility (MSF) rate and the Bank Rate at 5.75%.
The policy Repo rate which was cut to 5.25% in December 2025 had been put on hold in the next 4 MPC meetings. In the rate cut cycle the MPC had cut the rate by 125 basis points in phases from 6.5% to 5.25% before increasing it on Wednesday (October 7, 2026). The previous big rate hold cycle was 11 times at 6.50% from Apr 2023 to December 2024.
What happens when the RBI raises Repo rate?
When RBI raises repo rate (the rate at which RBI lends to banks), money becomes expensive.
So bank’s borrower less and to factor in the costly fund, they raise their lending rates (EBLR, MCLR) to protect their margin, and pass on the extra burden to borrowers. So in this case the loan interest rate will go up by 0.25%.
A hike in the repo rate means that the benchmark rate against which banks fix their deposit and lending rates would be affected said Madan Sabnavis, Chief Economist, Bank of Baroda
Typically, an increase in the repo rate would make banks increase their deposit rate depending on their own funding requirement. These changes may not be across the board but for certain maturity buckets only. Also, the quantum of increase need not be 25 bps and can be even lower depending on how the balance sheet of the bank looks, according to Mr Sabnavis.
This in turn affects the cost of funds which gets inbuilt into the concept of MCLR which is the marginal cost lending rate. This becomes the benchmark for banks which is used for lending especially to corporates who are not on the external benchmark rate. Banks apply a spread to the MCLR which varies across borrowers.
On the other side almost two thirds of lending is fixed to the external benchmark rate which includes the repo besides treasury bills and GSec. When loans are linked with the repo rate, there is a tendency for all existing borrowers on the EBLR to witness a similar increase in their borrowing cost to that of the repo which is 25 bps, he said.
“The other set of rates which get affected by the repo rate are treasury bills and GSec. However, these are driven by the market and not by a fixed formula. Often if the market is expecting a rate hike, it gets embedded in the GSec rate which we are witnessing already today. Hence the direct impact has been more or less limited,” he said.
In case of treasury bills yields there was a slight increase in the cut-offs in the auctions held post the policy announcement. Hence while the direction of change will be similar, the quantum would tend to be lower than the increase in repo rate, Mr Sabnavis said.
The overall idea for raising the repo rate as per economic theory is to slow down the growth in credit in the system which in turn will quell demand pull inflationary pressures, he stated.
What happens in case of repo rate hike?
Borrowers pay more for their loans. Their floating interest rates of existing loans go up. So their home, auto, business loan EMI goes up.
In case of fresh loans people borrow less. So there will be less demand for houses, cars, and business expansion.
What is the overall impact on the borrowers ?
The overall impact for borrowers will be a higher borrowing cost. All existing customers who are on the EBLR will witness an increase once interest rates are reset by the bank. For those on MCLR, the rates will change depending on the increase in MCLR which will be much lower than 25 bps.
“The change gets effective once it is time for a reset of rates as decided by the bank when sanctioning a loan to the customer. All new customers will pay the higher rates announced by banks as their MCLR,” Mr Sabnavis said.
What is the impact of the 25 bps repo rate hike on different segment of borrowers?
The maximum impact will be on home loan borrowers. Their existing floating rate of for example of 8.75% will rise to 9.00%. On a ₹1 crore 20 years loan the EMI will go up by ₹1,600.
The tenure will extend by 16 months if the EMI is kept the same. 75% of India’s retail loans are home loans.
New home buyers will be hit immediately. Banks will revise their letters of offers. Their affordability will drop by 2 to 3%. Their eligibility of ₹ 1 crore will reduce to ₹97 lakh.
“Home loans also fall in the retail category and would be linked to the external benchmark specified by the bank with the spread included. Normally home loans would be for a period of 10-20 years with interest rate reset at regular periods,” Mr Sabnavis said.
“Hence existing customers will pay a higher rate once the reset takes place. In case of new customers, the interest rate is automatically fixed at the new repo (TBill/GSec) rate plus spread. Rate hikes may not really dent the demand for such loans as any individual who takes a home loan is aware of the fact that the period of repayment will have several phases of higher and lower interest rate,” he added.
What will be the impact on auto loan borrowers?
Auto loans are normally linked with the external benchmark which can be repo, TBill or GSec. As these rates go up, the borrower will pay the same rate with the spread which is charged by the bank.
“In simple terms if the loan was 250 bps higher than the repo rate which was 5.25%, the borrower will pay now 250 bps more than the repo rate of 5.50%. Hence from 7.75% it will be up to 8%. While a single rate hike may not cause a fall in demand, a series of hikes can have an impact as it effectively increases the price of the automobile,” he said.
How will the MSME borrowers impacted?
As per the regulation, MSME loans too are fixed to the EBLR along with the retail loans. The difference would be the spread above the external benchmark which tends to be higher for MSMEs given the risk profile. They too would witness an increase in borrowing cost which is analogous to that of retail loans depending on the external benchmark chosen.
For new customers, banks do have the prerogative to change the spread over the new benchmark of say, the repo rate, and this can be done on a case-by-case basis. Here the credit score of the unit will be important and this is why it becomes important to maintain a good record, Mr Sabnavis said.
Published – October 08, 2026 12:48 pm IST
