What Happens When the Repo Rate Decreases? Effect on Home Loan EMI

Last updated: Oct 2026

When the repo rate decreases, lenders can cut the rates on floating loans linked to it. Your Equated Monthly Instalment (EMI) or tenure changes only when your lender resets your rate.

• Repo rate rose on 7 October 2026: 5.25%*, an increase by 25 basis points, and floating loans linked to it can rise
• Next decision: the Monetary Policy Committee (MPC) announces it on 4 December 2026
• Cut of 0.25 percentage point: EMI down Rs. 643, or the loan shorter by 5 months
• Cut of 1.25 percentage points: EMI down Rs. 3,167, or the loan shorter by 22 months

• Fixed-rate loans: no change

  
  

Check your sanction letter for the benchmark and the reset date. When the lender offers the choice, keep your EMI to shorten the loan if you can afford it.

When the repo rate decreases, the cost of short-term money for banks falls, and lenders can cut the rates on floating-rate loans linked to it. The repo rate is the rate at which the Reserve Bank of India (RBI) lends short-term money to banks against government securities. The RBI's Monetary Policy Committee sets it.

The chain runs in 4 steps:

1. The RBI lowers the repo rate.
2. Banks' funding costs fall.
3. Lenders reduce the rates on loans linked to the repo rate.

4. At your next reset, your EMI falls or your loan gets shorter.

   
   

A fixed-rate loan does not move. A basis point is 0.01 of a percentage point, so 25 basis points equal 0.25 percentage point.

A cut of 0.25 percentage point lowers the EMI by Rs. 643 on the example loan, and a cut of 1.25 percentage points lowers it by Rs. 3,167. If you keep the EMI, the loan ends sooner.

Formula used: New EMI = outstanding × r × (1 + r)^n ÷ ((1 + r)^n − 1), with the new rate and the months left.

Assumptions: Rs. 50 lakh loan taken at 8.50% per annum for 20 years, with 15 years left and Rs. 44.06 lakh outstanding. The rates are illustrative, not quotes.

Keeping the EMI after the 1.25 point cut ends the loan 1.8 years early and saves Rs. 9.6 lakh of interest. Lowering the EMI instead frees cash each month.

No. When the repo rate decreases, the change reaches you at your next rate reset, and the date depends on your loan's benchmark. Banks link new floating-rate retail loans to an external benchmark, such as the repo rate, under the external benchmark lending rate regime. Housing finance companies and other lenders follow their own policy.

The Reserve Bank of India circular of 18 August 2023 requires lenders to tell you promptly when a reset changes your EMI or tenure. It also requires an option to switch to a fixed rate at reset. Read your sanction letter for the benchmark your Bajaj Finance loan follows and its reset frequency.

Five steps make sure you receive the benefit.

1. Find the benchmark and the reset date in your sanction letter.
2. Wait for the lender's notice of the new EMI or tenure.
3. Choose between a lower EMI and a shorter loan, if the lender offers the choice.
4. Compare your rate with rates on new loans. If the gap is large, read the guide to home loan balance transfer.

5. Use any saved cash for a part-prepayment, which carries no charge on a floating-rate loan to an individual.

   
   

Do not assume that a cut changes your EMI automatically. Confirm the new figure in writing.

No. A lower rate helps floating-rate borrowers and hurts savers, because deposit rates can fall too. It does nothing for a fixed-rate loan. Rates can also rise again.

The 2025 cuts totalled 125 basis points, from 6.50% to 5.25%, which held steady until the 25-basis point rise to 5.25%* on 7 October 2026. The next MPC decision is due on 4 December 2026, so check the RBI website for the latest rate before you act.

Consider Deepak, a 40-year-old sales head in Pune with a household income of Rs. 1.6 lakh a month and a CIBIL Score of 756, who took a Rs. 50 lakh loan 5 years ago at 8.50% p.a. for 20 years.

Formula used: Balance after 60 EMIs of Rs. 43,391 is Rs. 44,06,359.

Deepak keeps his EMI and shortens the loan. The cut changes his EMI by only Rs. 643 a month, so he compares it with prepaying from his bonus.

Bajaj Finance offers home loans with the terms below, subject to credit assessment.

Approval timelines can extend where the benchmark reset date falls after your application, and minimum income thresholds can differ by city. Check your home loan eligibility and test a new rate with the home loan EMI calculator.