Mint Explainer | What RBI's rate hike means for retail borrowers and lenders

Summary

For retail borrowers whose floating-rate loans are linked to the repo rate, either monthly payouts will rise, or the tenure of their repayments will increase. Lenders will soon start passing on the revised interest rates.

The Reserve Bank of India (RBI) on Wednesday hiked the repo rate by 25 basis points to 5.5%, its first hike in nearly four years, joining a host of global central banks building its defences against inflation risks.

The hike will lead to a near-immediate increase in equated monthly instalments or EMIs for retail borrowers whose loans are linked to the repo rate. Repo rate is the interest rate at which commercial banks borrow from the RBI. Mint takes a look at what this means for borrowers and savers.

What does the rate hike mean for retail borrowers?

For retail borrowers whose floating-rate loans are linked to the repo rate, either monthly payouts will rise, or the tenure of their repayments will increase. Lenders will soon start passing on the revised interest rates. Under RBI guidelines, banks must peg all retail and small-business loans to an external benchmark, typically the repo rate. This aids transmission of RBI's policy actions into interest rates on loans by banks. Borrowers with home and auto loans linked to external benchmarks will soon have to pay more or pay the same amount for longer. At the end of June, over 68% of floating-rate loans were linked to external benchmarks.

What will this mean for corporate borrowers?

Although the change in lending rates will not be immediate for corporates, they too will face rising interest rates now. Their borrowings from the bond markets will also get costlier as bond yields harden. As far as bank loans are concerned, lenders usually price corporate loans on an internal benchmark called marginal cost of funds-based lending rate or MCLR and is linked to deposit rates. When RBI hikes rates, banks tend to hike their deposit rates. Unlike lending rates, deposit rate changes only impact fresh inflows, while exiting deposits remain unchanged till maturity. This usually means that it takes about two-three quarters for deposits to be repriced, leading to a delayed transmission in MCLR rates.

Will this impact credit growth?

While this will make borrowing more expensive, the current rate hike is unlikely to materially dent credit growth. Bankers believe there is ample room for growth, given that they are flush with liquidity following inflows of $132.9 billion under the special foreign currency non-resident (FCNR) deposit scheme. Bank non-food credit grew 18.8% year-on-year (y-o-y) till the end of August to ₹222.8 trillion. Within this, retail loans grew 16.9% to ₹72.9 trillion. Among retail segments, home loan growth was at 11.1%, while vehicle loans expanded 19.7% in the same period.

How will this impact lenders?

For banks, this would bring some cheer as their margins are expected to be under pressure after the surplus liquidity pressure following large inflows under the FCNR programme. Mint reported on 6 October that a surge in foreign-currency deposits is giving Indian banks ample liquidity to sustain strong credit growth but the surplus is set to squeeze net interest margins (NIMs) this quarter.

Analysts expect the rate hikes to balance some of the margin pressure. Lending rates have been moving up for months now, with the weighted average lending rate on fresh loans at 8.61% in August, the highest since November 2025, per data from the RBI.