After the increase in repo rate by 25 basis points by the Reserve Bank of India (RBI), the entire budget of crores of loan customers of the country may get shaken. For the first time after February 2023, the central bank has increased the repo rate to 5.50 percent. This decision of the Monetary Policy Committee (MPC) headed by RBI Governor Sanjay Malhotra will have a direct impact on the pockets of the general public. Now the rates of home loan, car loan and personal loan are going to become expensive for new loan takers as well as for old loan customers.
What will be the impact on your EMI and loan tenure?
People who have taken home, car or personal loan on floating rate may see an increase in both their monthly installment (EMI) and the loan tenure. If banks pass on the entire 0.25% increase in repo rate to customers, your monthly installment amount will increase. At the same time, in many cases, banks increase the tenure of your loan by not changing your installment amount, which means that you will have to pay installments for more months. However, this decision will not have any impact on customers who have taken loans at fixed rates.
What to do if the bank extends the tenure of the loan?
Whenever RBI increases the repo rate, many banks (especially private banks) silently increase the tenure of their loans instead of increasing the monthly installment amount of the customers. Many times customers come to know about this when they check their loan statement. If your bank has also extended the tenure of your loan without any prior notice, then you do not need to panic. You have many rights under banking rules.
- Ask for instant reset schedule and loan statement from the bank: First of all, go to your bank’s customer portal, mobile app or nearest branch and get the new Amortization Schedule. See what your total interest rate has been after the repo rate increase. Check how many months the bank has extended your loan tenure in exchange for 0.25% increase in interest rate.
- Choose option to increase EMI: Long tenure means paying additional interest of several lakhs of rupees to the bank. In such a situation, it would be wise that instead of increasing the loan tenure, you should increase the amount of your EMI. You can give a written application to the bank asking them to increase your monthly installment (EMI) instead of extending the tenure of your loan.
- Reduce the burden by making part payment: If your income allows, make part-payment of the loan from the bonus you get every year or during festivals. There is no penalty or pre-payment charge on floating rate loans like home loans. Even a small part-payment amount can set back your extended tenure by several years.
If satisfactory resolution is not received within 30 days, you can file an online complaint with the Banking Ombudsman of RBI.
Which loans will become expensive first?
According to RBI data, at the end of June, about 68.2 percent of the total floating rate rupee loans of banks were linked to the external benchmark (EBLR).
- Repo Rate Linked Loans (EBLR/RLLR)According to the rules of the Reserve Bank, it is mandatory for banks to revise the loan rates linked to external benchmark at least once in three months. In such a situation, home and personal loan rates linked to repo rate will increase immediately as soon as the next reset date comes.
- MCLR related loans: About 29.6% of the loans are linked to the bank’s Marginal Cost of Funds Based Lending Rate (MCLR). These include MSME and corporate loans. The impact on these will be visible a little late, as the rates will change only on the reset date fixed in the contract after the banks review their funding costs.
The way forward for the general public and new loan buyers
Currently, the country’s largest public sector bank, State Bank of India (SBI) is offering home loans at an initial rate of 7.25% per annum. However, the interest rate and timing of change for individual customers will depend on the terms of their loan agreement. RBI Governor has made it clear that there is no possibility of cutting rates at present. In such a situation, people planning to buy a house or car in this festive season will now have to be prepared for high interest rates and heavy installments.
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SK Sharma is a content writer who writes on news, entertainment, and lifestyle topics. She has over four years of experience and is known for conveying information in simple and clear language.
