Business Original explainer
The repo rate sets what banks pay for money — and what you pay on your loan.
On 7 October 2026, the Reserve Bank of India (RBI) raised the repo rate by 0.25 percentage points, from 5.25% to 5.50%. After cuts of 1.25 percentage points during 2025, it was the first increase since February 2023. If you have a home or car loan, that decision is why your rate has gone up — or will do so at your next reset date.
What is repo rate, in plain terms? It is the interest rate at which the RBI lends short-term money to banks. A bank needing funds borrows from the RBI and hands over government securities as collateral, agreeing to buy them back shortly afterwards. As the price banks pay for money, it sets the starting point for the rates they charge you.
Think of the RBI as the bank for banks. On days when a bank needs extra cash for withdrawals, payments and lending, it can borrow from the RBI at the repo rate, against government securities it holds.
When the repo rate goes up, money becomes costlier for banks; when it goes down, money becomes cheaper.
The repo rate is not the rate on your loan. Your home loan rate is usually the repo rate plus a spread — the bank's margin. If the repo rate is 5.50% and the spread is 2.50 percentage points, your loan rate would be around 8.00%. When the repo rate moves, the spread usually stays the same, so your loan rate moves by the same amount.
The repo rate is set by the RBI's Monetary Policy Committee (MPC), a six-member panel chaired by RBI Governor Sanjay Malhotra — three members from the RBI and three external members appointed by the government. Decisions are taken by majority vote, with the Governor holding a casting vote in a tie. The October 2026 increase was unanimous.
By law, it must meet at least four times a year; in practice, it meets six times, roughly every two months, on dates published in advance. Its next meeting is scheduled for 2 to 4 December 2026, with the decision announced on 4 December.
The committee's job is to keep retail inflation — measured by the Consumer Price Index (CPI) — close to 4%, within a band of 2% to 6% set by the government. Each meeting weighs inflation, growth and global conditions before deciding to raise, cut or hold.
For most borrowers, the link runs through a repo-linked loan. Since 1 October 2019, the RBI has required banks to link new floating-rate retail loans — including home loans — to an external benchmark, and in practice almost every bank uses the repo rate. This is the External Benchmark Lending Rate (EBLR).
Under that system, your loan rate is the repo rate plus a fixed spread, reset at least once every three months. So the 0.25 percentage point rise on 7 October 2026 should reach repo-linked borrowers at their next reset date, within three months at most.
Older loans work differently. Many taken before October 2019 still run on the Marginal Cost of Funds-based Lending Rate (MCLR), an internal benchmark set by each bank, which typically resets only once a year. Fixed-rate loans are unaffected until the fixed period ends. Check your statement for EBLR or repo-linked, and note your reset date.
Take a home loan of Rs 50 lakh for 20 years. Assume the rate is 8.00% before the change and 8.25% after the full 0.25 percentage point rise is passed on, with the EMI recalculated on a reducing-balance basis and the tenure unchanged. These are illustrative assumptions, not a bank quote.
At 8.00%, the EMI is Rs 41,822 a month. At 8.25%, it is Rs 42,603 — an increase of Rs 781 a month. A quarter-point move sounds small, yet on a large, long loan it adds several hundred rupees to every payment.
Some banks instead keep the EMI unchanged and stretch the tenure, so you pay the same each month but for longer — and more interest overall.
The RBI raises the repo rate mainly when it worries prices will keep rising: dear money slows borrowing and spending, taking pressure off prices. It cuts the rate to encourage borrowing and support growth. In October 2026, the RBI projected CPI inflation at 5.2% for 2026-27 and noted inflation was no longer as benign as the previous year — the backdrop to the hike and to its change of stance to calibrated tightening, signalling rate cuts were off the table in the near term.
Two other rates sit on either side of the repo rate. The reverse repo rate is its mirror image: the rate at which the RBI borrows from banks, taking in surplus funds. The fixed reverse repo rate is 3.35%, but since April 2022 it has largely been replaced as the floor by the Standing Deposit Facility (SDF), at 5.25%, under which banks park surplus funds with the RBI without handing over securities. At the other end is the Marginal Standing Facility (MSF), at 5.75%, an emergency overnight window for a bank short of funds. Together they form a corridor — 5.25%, 5.50% and 5.75%.
For a borrower, the chain is what matters: the MPC sets the repo rate, the repo rate sets the cost of money for banks, and for a repo-linked loan that cost reaches your EMI within a quarter. The next date to watch is 4 December 2026.
This explainer was written by The Daily Short's desk from the sources listed above. It is general information, not professional advice. Spot an error? See our Corrections Policy or tell us via the Contact page and we will correct it. Follow our official Instagram @thedaily.short.