Repo Rate & Rate Transmission

Imagine a wholesale supplier who cuts the price it charges retailers, but individual retailers each take a different amount of time, and pass on a different share of that saving, before shoppers actually see cheaper prices on the shelf. The gap between an RBI repo rate move and an actual change in your loan's interest rate works through almost exactly this kind of imperfect, uneven chain.

The repo rate is the rate at which RBI lends short-term money to banks against government securities as collateral, and it is the primary lever RBI uses to signal its monetary policy stance, cutting it to encourage cheaper borrowing and stimulate the economy, raising it to cool inflation. When RBI changes the repo rate, banks' own cost of funds shifts, and in theory, their lending rates should move accordingly.

For years, this transmission was notoriously slow and incomplete, banks were quick to raise lending rates when the repo rate rose, but often slow to cut them when it fell, protecting their margins at borrowers' expense. To fix this, RBI mandated from October 2019 that most retail and small business loans be linked to an External Benchmark Lending Rate, EBLR, typically the repo rate itself plus a bank-specific spread, replacing the older, more discretionary MCLR, Marginal Cost of Funds based Lending Rate, system for these loan categories.

EBLR-linked loans now reprice automatically and relatively quickly whenever the repo rate changes, since the benchmark itself is external and cannot be quietly delayed the way a bank's own internally calculated MCLR sometimes was. Existing loans still on MCLR, and most corporate lending, which follows its own separate pricing logic, continue to see somewhat slower, less mechanical transmission.

Whenever RBI cuts the repo rate and news coverage discusses how quickly EMIs will actually fall, EBLR versus MCLR linkage is the specific reason some borrowers see an almost immediate reduction while others, on older loan structures, wait considerably longer, or see a smaller cut than the headline repo rate move might suggest.