What It Means
The repo rate is the interest rate at which RBI lends short-term money to commercial banks, against government securities as collateral. It's the base rate that RBI's Monetary Policy Committee sets roughly every two months, and it works as the anchor for almost every other interest rate in the economy: home loan rates, fixed deposit returns, and how expensive it is for a bank to raise money in the first place.
How It Works
When RBI raises the repo rate, borrowing from RBI gets costlier for banks, so banks typically raise the rates they charge on loans and, over time, the interest they pay on deposits too. When RBI cuts it, the opposite happens: banks' cost of funds falls, and loan rates tend to follow, though not always immediately or in full. Most floating-rate retail loans in India, home loans included, are linked to an external benchmark tied to the repo rate, so a repo change reaches your EMI only from your loan's next reset date, not the day RBI announces it.
Example
Say a bank's repo-linked home loan rate drops from 9.00% to 8.75% after a 25 basis point cut. On an outstanding ₹50 lakh loan with 15 years left, that quarter-point drop can lower the EMI by roughly ₹700 a month, or the borrower can keep the EMI the same and shorten the loan tenure instead.
Warning
A repo rate cut doesn't touch every loan. Fixed-rate loans stay exactly where they were, and even floating-rate loans only reprice from the loan's next reset date, not the day of the announcement.