Interest Rates: Repo Rate, FDs, Loans and You

Interest is the price of using money for a period of time. You pay it when you borrow and earn it when you lend or deposit, so it is an expense in one case and income in the other. Interest rates are usually quoted as a percentage per year. In India, the most important benchmark is the RBI's repo rate, which influences what banks charge on loans and pay on deposits.

Why does interest matter in everyday decisions?

Interest matters because any delay in receiving money has a cost: the interest you could have earned in the meantime. This is called an opportunity cost.

Suppose a friend borrows ₹2,00,000 from you for six months and returns it on time without interest. You have lost nothing on paper, but if that money had been in a fixed deposit earning a hypothetical 7% a year, it would have earned about ₹7,000 in those six months. That is the real cost of the favour.

Interest rates also give you a benchmark for comparing choices. Suppose you could buy a plot of land for ₹10 lakh that might be worth ₹13 lakh in five years. That works out to about 5.4% a year. The same ₹10 lakh in a deposit paying a hypothetical 7% a year, compounded yearly, would grow to about ₹14 lakh before tax, with far less effort and risk. The interest rate tells you whether the land is worth the trouble.

What is the repo rate?

The repo rate is the rate at which the Reserve Bank of India lends money to banks for short periods, against government securities as collateral. It is the RBI's main policy rate. When it changes, banks' own borrowing costs change, and that gradually flows into the rates you pay on loans and earn on deposits.

The repo rate is set by the RBI's Monetary Policy Committee, which usually meets every two months. On 7 October 2026 it raised the repo rate by 0.25 percentage points to 5.50% (RBI, 7 October 2026).

Two related rates set a corridor around the repo rate:

• Standing Deposit Facility (SDF) rate, 5.25%: the rate the RBI pays banks that park surplus money with it. It has been the lower end of the corridor since April 2022, a role the reverse repo rate used to play.
• Marginal Standing Facility (MSF) rate, 5.75%: the higher rate at which banks can borrow from the RBI in an emergency.

As of October 2026. All three rates are those set on 7 October 2026. The RBI reviews them at every policy meeting, so check the current rates on the RBI website, where they are shown on the home page.

How are interest rates and inflation linked?

The RBI raises interest rates to slow inflation and cuts them to support growth. The government has set the RBI an inflation target of 4%, measured by the consumer price index, with a tolerance band of 2% to 6%, for April 2026 to March 2031 (as of October 2026; see the RBI website for the current framework).

1. When interest rates are low, borrowing is cheaper, people and businesses spend more, and demand rises.
2. If demand rises faster than supply, prices go up, which is inflation.
3. To cool it, the RBI raises the repo rate. Loans become costlier, people borrow and spend less, demand eases and price rises slow down.

This matters directly to borrowers. Since 1 October 2019, the RBI has required banks to link new floating-rate retail loans, such as most home loans, to an external benchmark like the repo rate. So when the repo rate changes, the interest on such loans changes too, at the next reset date. Under RBI rules, these rates must be reset at least once every three months.

What does a repo rate change mean for you?

A repo rate change reaches people in different ways, and not all at once:

If you have	When the repo rate rises	When the repo rate falls
A floating-rate home or car loan	Your rate rises at the next reset; the lender raises your EMI or extends the loan term	Your rate falls at the next reset; you may get a lower EMI or a shorter term
An existing fixed deposit	No change: the rate is locked until maturity	No change: the rate is locked until maturity
Plans for a new fixed deposit	New deposit rates tend to rise	New deposit rates tend to fall
A fixed-rate loan	No change during the fixed period	No change during the fixed period

If your EMI stays the same after a rate rise, check whether your lender has extended your loan term instead. A longer term means paying more interest overall. Under RBI rules on resetting floating rates, lenders must tell you about such changes and offer choices, such as a higher EMI, a longer term or prepaying part of the loan, so review your loan statement after every rate change.

What is the difference between simple and compound interest?

Simple interest is calculated only on the original amount, while compound interest is also calculated on interest already earned.

• Simple interest: ₹1,00,000 at 10% a year earns ₹10,000 in a year.
• Compound interest, added half-yearly: the rate per half-year is 5%. After six months you earn ₹5,000, making ₹1,05,000. For the next six months you earn 5% of ₹1,05,000, which is ₹5,250. The total for the year is ₹1,10,250, or ₹10,250 of interest.

The more often interest is compounded, the higher the effective yearly rate. The previous lesson on the power of compounding shows how large this effect becomes over many years.

How do banks charge interest on loans?

Most bank loans charge interest on a reducing balance. Each EMI contains some interest and some repayment of principal, and the next month's interest is calculated only on the principal still outstanding. As you repay, the interest part of each EMI shrinks.

A flat rate charges interest on the full original amount for the whole loan period, however much you have repaid. That makes a flat rate far more expensive than it sounds:

Loan of ₹1,00,000 for 5 years	10% reducing balance	10% flat
Monthly EMI	₹2,125	₹2,500
Total interest paid	₹27,482	₹50,000
Equivalent reducing-balance rate	10%	about 17.3% a year

Loans also come with either a fixed or a floating rate. A fixed rate stays the same for the agreed period, so you know your EMIs in advance. A floating rate moves with the benchmark, so your EMI or loan tenure can go up or down. A deposit that pays a fixed rate for a fixed term is, as the name suggests, a fixed deposit.

How can you spot the real cost of a loan?

Compare the total amount you will pay, not just the headline interest rate. Several things can make a loan costlier than its quoted rate:

• Advance EMIs: if some EMIs are collected upfront, you receive less money but pay interest on the full amount.
• Processing fees and other charges: these are deducted from the loan or paid separately and raise the real cost.
• How often the balance is reduced: if the outstanding balance is reduced only once a year rather than every month, you keep paying interest on money you have already repaid.
• Prepayment and foreclosure charges: these affect the cost if you plan to close the loan early.

Since 1 October 2024, banks and NBFCs must give borrowers a Key Facts Statement (KFS) for retail and MSME term loans. It shows the Annual Percentage Rate (APR), which includes the interest rate and most fees, so you can compare loans on the same basis under an RBI circular of 15 April 2024. Credit cards are not covered by the KFS rule.

How do you compare deposits that pay interest at different intervals?

When you earn interest, the general rule is: the sooner it is credited and reinvested, the better. Convert each offer to an effective annual rate to compare them fairly. For a quoted rate of 8% a year:

Interest compounded	Effective annual rate
Yearly	8.00%
Half-yearly	8.16%
Quarterly	8.24%
Monthly	8.30%

This holds only if the interest stays invested. Interest paid out and spent each month does not compound. Many banks compound cumulative fixed deposits quarterly, so check your deposit's terms to see which applies.

Quick quiz

3 quick questions on this lesson. Choose your answers, then press Check answers.

1. What is the repo rate?

Choose one answer.

The rate banks charge customers on home loans The rate at which the RBI lends money to banks The rate banks pay on savings accounts The rate the government pays on its bonds

Show answer

Answer: The rate at which the RBI lends money to banks. The repo rate is the RBI's main policy rate. Changes in it flow through to loan and deposit rates.

2. For a ₹1,00,000 loan over five years, which statements are true?

Choose all that apply.

A 10% flat rate costs more than a 10% reducing-balance rate A flat rate charges interest on the full original amount throughout Flat and reducing-balance rates cost the same The APR in the Key Facts Statement helps you compare loans

Show answer

Answer: A 10% flat rate costs more than a 10% reducing-balance rate; A flat rate charges interest on the full original amount throughout; The APR in the Key Facts Statement helps you compare loans. The flat loan costs ₹50,000 in interest against ₹27,482, about 17.3% a year in reducing-balance terms. The APR puts loans on the same footing.

3. When the repo rate rises, the interest rate on your existing fixed deposit rises too.

True or false?

True False

Show answer

Answer: False. An existing fixed deposit keeps its rate until maturity. Only new deposits are likely to get higher rates.