Repo Rate Transmission: Why Your EMI goes UP fast but DOWN slow

The "Rocket and Feather" Phenomenon

Have you ever noticed this pattern with your Home Loan?

• •RBI Hikes Repo Rate (Friday): Your Bank sends an SMS on Saturday saying "Dear Customer, your Home Loan ROI has increased."
• •RBI Cuts Repo Rate (Friday): Silence. Complete silence for 3 months.

Economists call this the "Rocket and Feather" effect. Prices go up like a Rocket but come down like a Feather.

For the average salaried employee paying a ₹50,000 EMI, this feels like cheating. It feels like the bank is stealing from you. But here is the "Bank Manager" truth: It is not theft. It is Engineering.

In this deep dive, we will open the black box of banking. We will explain EBLR, MCLR, Reset Dates, and Net Interest Margins (NIM) to show you exactly how the system is designed to win.

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Part 1: The Engine Room - Repo Rate vs Your Rate

To understand why your EMI isn't dropping, you first need to understand how the price of money is decided.

1. The Source (Repo Rate)

The Reserve Bank of India (RBI) lends money to banks at the Repo Rate (Repurchase Rate).

• •If Repo Rate is 6.5%, the bank gets money at ~6.5%.
• •The Bank adds its profit margin (Spread) and lends to you at 8.5%.

2. The Transmission Problem

In an ideal world, if Repo drops to 6%, your loan should drop to 8%. But banks are for-profit organizations. They have a massive cost called "Cost of Deposits".

• •If they reduce your loan interest immediately, they lose income.
• •But they cannot reduce the Fixed Deposit (FD) rates immediately (because FDs are locked for 1-5 years).
• •result: If they pass on the rate cut instantly, their profit margin (NIM) collapses.

So, they invented systems to "smooth out" this transmission.

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Part 2: The Two Villains - MCLR and EBLR

Historically, banks used internal benchmarks to decide rates. Let's look at the evolution.

A. Base Rate / MCLR (The Old Regime)

Before 2019, loans were linked to MCLR (Marginal Cost of Funds based Lending Rate).

• •How it worked: The bank calculated its own cost of funds (Savings + FDs + Borrowings) and set a rate.
• •The Problem: It was a "Black Box". Even if RBI cut rates by 0.50%, the bank would say "Oh, but our cost of funds hasn't come down because we are still paying high interest on old FDs."
• •Result: Transmission was notoriously slow. Rate cuts rarely reached the customer.

B. EBLR (The New Regime - Oct 2019)

The RBI got angry. They ordered banks to link retail loans to an External Benchmark (like Repo Rate). Enter EBLR (External Benchmark Lending Rate).

• •The Formula: Repo Rate + Spread = Your Interest Rate
• •Example: 6.5% (Repo) + 2.0% (Spread) = 8.5%

The Promise: Transparency. If Repo moves, your rate must move. The Trap: It must move... but WHEN?

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Part 3: The "Reset Date" Trap

This is the single most important clause in your Loan Agreement that 99% of people ignore.

Every EBLR loan has a "Reset Period" (usually 3 months or on a specific date). Your interest rate does NOT change on the day of the RBI announcement. It changes on your Reset Date.

The Scenario:

1. •Jan 1st: You take a loan. Your Reset Date is set to April 1st (Quarterly Reset).
2. •Feb 1st: RBI cuts Repo Rate by 0.50%.
   • •Market Reaction: News channels scream "Home Loans get Cheaper!"
   • •Your Reality: Your EMI stays EXACTLY the same.
   • •Why? Because your loan is "locked" until the next Reset Date.
3. •Feb & March: You continue paying the higher rate. The bank enjoys this "extra" interest for 2 months.
4. •April 1st: Finally, your rate resets to the lower value.

The "Rocket" Effect: Banks are smart. They often have clauses that allow them to reset faster in a rising rate environment (to protect asset quality) or they simply time the resets such that the majority of their loan book resets after a hike cycle begins.

Banker's Secret: In a rising rate cycle, the Reset Date is the bank's enemy. In a falling rate cycle, the Reset Date is the bank's best friend.

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Part 4: The Net Interest Margin (NIM) Protection

Why do EMIs go up fast? When RBI hikes rates, the bank's cost of borrowing (from RBI) goes up instantly. To protect their Net Interest Margin (NIM)—the difference between interest earned and interest paid—they pass this hike to you immediately (subject to reset dates).

The "Spread" Manipulation: The Formula is: Repo + Spread.

• •Repo is controlled by RBI.
• •Spread is controlled by the Bank.

Banks cannot change the "Spread" for existing customers arbitrarily. But they can change it for New Customers. Often, you will see offering lower rates to new applicants while existing customers are stuck at higher rates. market logic: "New Customer Acquisition" requires competitive pricing. "Existing Customer Retention" relies on your laziness (it's hard to switch loans).

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Part 5: Actionable Strategy - How to Win

You cannot control the RBI. You cannot control the Bank. But you can control your Loan Account.

1. Check Your Reset Date

Open your loan sanction letter. Search for "Reset Frequency" or "Reset Date".

• •If it is 1 Year (MCLR style), you are in trouble during rate cuts. Switch to EBLR immediately.
• •If it is 3 Months, you are fine. Just wait.

2. The "Conversion" Trick

If you see your bank offering a new loan at 8.35% but you are paying 9.0%:

1. •Walk into your branch.
2. •Ask for a "Conversion" or "Repricing".
3. •Pay a small fee (usually ₹1000 - ₹5000).
4. •The bank will reduce your "Spread" to match the current market offer.

• •Why don't they do this automatically? Because if you don't ask, that 0.65% difference is pure profit for them.

3. Switch to EBLR (if on MCLR)

If your loan is from before 2019 and linked to MCLR/Base Rate, you are bleeding money. Switching to Repo Linked Loan (RLLR/EBLR) is a Right, not a request.

• •Cost: Minimal (processing fee).
• •Benefit: Immediate transmission of low rates and transparency.

Summary

The banking system is designed to protect the Bank's balance sheet first, and your wallet second. The "Rocket and Feather" effect is not a glitch; it is a feature of a robust banking system ensuring solvency. As a borrower, your only defense is Awareness.

Know your Reset Date. Negotiate your Spread. And never assume the bank will lower your rate out of the kindness of its heart.