RBI reduced Repo Rate, still EMI remains the same! Know why banks are not giving relief on EMI?

Business Desk – The Reserve Bank of India (RBI) often cuts the repo rate during its Monetary Policy Committee (MPC) meetings. The reduction in repo rate has a direct impact on the interest rates charged on loans for the common people. As a result, the repo rate cut should theoretically bring down loan interest rates and also reduce EMIs; However, in reality this does not always happen immediately.

Often, banks or financial institutions delay passing on the benefits of interest rate cuts to customers or make very minor cuts. Given this situation, it is very important for customers to understand why this happens. Today, we will discuss this topic in detail. Come, let us get complete information about it.

Why don’t interest rates reduce immediately after repo rate cut?

In case of floating-rate home loans, the interest rates do not change daily. Banks review interest rates after a fixed time interval. This interval can range from three months to six months, or sometimes even up to a year. As a result, even if interest rates go down in the market, your loan rate may remain the same till the next scheduled reset date. This is the main reason why immediate relief on EMI is not available.

Floating-rate loans are primarily made up of two components: the benchmark rate and the spread. The benchmark rate varies according to market conditions, while the spread is decided by the bank and usually remains constant. Therefore, if only the benchmark rate has come down, it is not necessary that the interest rate on your entire loan also comes down proportionately.

Many old loans are still linked to old interest rate systems. Under such systems, the benefits of reduction in market rates do not reach customers as fast as they should. The new framework of interest rates is considered more transparent and effective. As a result, old customers often get less relief than new customers.

In some cases, banks do not automatically pass on the benefit of new interest rates to their customers. To receive these benefits, customers may need to submit a formal application or pay a conversion fee. Many people are not aware of this process, due to which they lose the opportunity to take advantage of low interest rates.