RBI's Rate Cut May Not Bring EMI Relief for All Borrowers Right Away

RBI has cut repo rate, which could lower EMIs. But the impact varies by loan type and transmission speed

- Jash Kriplani

The Reserve Bank of India (RBI) has cut the repo rate by 50 basis points (bps) and the cash reserve ratio (CRR) by 100 bps, raising hopes among borrowers of lower EMIs. But rate cuts by the central bank don't automatically translate into immediate relief for all loan categories.

The actual transmission, whether faster, slower, or none at all, will depend upon multiple factors, including the type of loan, when it was taken, the lending institution, and the benchmark it is linked to. Certain loan categories—particularly personal loans and credit card debt—are typically offered at fixed interest rates. The rate set at the time of disbursement remains unchanged through the tenure of the loan, regardless of RBI's policy moves.

"Most lenders offer loans in these categories as fixed-rate loans. Then there are categories, which are more of a mixed bag. For example, loans such as car loans and loans against securities," said Adhil Shetty, chief executive officer of BankBazaar. To be sure, some public sector banks even offer personal loans with a floating rate option.

When it comes to car loans or loans against securities, the interest rate may be fixed or floating. If floating, these are linked either to internal or external benchmarks set by the banks. Since 1 October 2019, all new floating-rate loans must be linked to external benchmarks. However, older loans are often tied to internal benchmarks.