Repo, Reverse Repo Rate and Its Impact on Home Loans

Repo rate is a financial concept related to financial institutions and their legal obligations towards the Reserve Bank of India. Be it a bank or a non-banking financial company, all lending institutions have to pay interest to the RBI under the Government of India for letting them borrow money for their operations. This rate is fixed for a certain tenure, but according to economic situations, like inflation or recession of the country, the RBI can change it uniformly for all lending institutions.

All lending institutions base their personal and home loan rates on this repo rate. The repo rate change's effect on home loans becomes evident when considering interest rates and additional charges. Read on to know more about it.

What Is the Repo Rate for Home Loans?

The term “Repo Rate” is a short way of saying Repurchase Option. Its working is simple. To be able to give out funds, a lending institution requires an initial lump sum amount. It gets this amount from the RBI at an interest rate. Another circumstance under which it needs to borrow money from the central bank is when it falls short of liquid funds to dish out.

As of June 2025, the the repo rate is 5.50%. Repo rate increases and decreases with inflation, however, with different rates.

There is one major reason that the RBI spikes up the repo rate, i.e. to help regulate lending practices across the country. When inflation rises, the RBI bumps up the interest rate that lending institutions face. As a result, these firms hesitate in borrowing funds, causing a further dip in borrowing at the customers’ end. Overall liquidity drops and inflation finds a coolant.

For home loans, the repo rate increase effect can be observed almost immediately across lending firms. Lending firms need to increase their interest rates by a certain fraction so that they can continue running their business in a stable manner.

What Is Reverse Repo Rate?

A functional financial system is safe and stable when the overall liquidity that it runs on is kept nominal. This is the objective of the central regulatory body, the RBI. To prevent an overshoot in liquidity of cash in the economy, the RBI has put in place reverse repo rates.

A reverse repo rate is the interest that the RBI gives to lending firms when it borrows funds from them. It is the reverse of a repo rate. However, this value isn’t the same as the repo rate. The reverse repo rate is at 3.35%, as of June 2025. It is kept lower than the repo rate since it is only a tool that maintains cash flow in the system.

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What Is the Difference Between Repo Rate and Reverse Repo Rate?

These two rates differ by the following factors:

• Meaning- The repo rate is the rate at which the RBI grants loans to lending institutions in order to meet a shortfall in funds and control inflation. The rate at which lending institutions grant loans to the RBI to control the money supply in the economy is called the reverse repo rate.
• Rate: The current repo rate is 5.50%, while the reverse repo rate is at 3.35%.
• Bodies Involved: The repo rate is given by the lending institution to the RBI, while the reverse repo rate is given by the RBI to the lending institution.
• Reasons: Repo rate is levied when banks or NBFCs require liquid funds, while the reverse repo rate is levied to discourage high liquidity.
• Working Backbone: Repo rate is based on repurchase agreements, while reverse repo rates are based on reverse repurchase agreements.

How Does a Change in Repo Rate Affect Home Loans?

When the repo rate changes, banks or NBFCs have to bear higher costs of borrowing from the RBI. A lower repo rate translates into lower EMIs for the borrowers. Likewise, when the repo rate is increased, it directly impacts the home loan interest rates. Since lenders are paying high interest rates themselves to acquire the necessary funds and manage their own revenue, this in turn forces lenders to increase their home loan lending rates by a certain degree. They adjust processing fees, closure costs, and service charges to help them combat the expense. However, this change in percentage is relatively low compared to the change in repo rate.

Conclusion

Despite changes in repo rate, home loans are always going to be great options for you to consider for financial support.

Planning to finance your home purchase at the best interest rates? Turn to SMFG Grihashakti and save huge on your home loan. It should be noted that our interest rates are not linked to the repo rate. They are instead linked to the Retail Prime Lending Rate and start at only 10%* per annum, while loan tenures go up to a flexible 30 years*. You can check out your EMI obligations through our home loan EMI calculator online to plan your home loan budget accordingly. Take the first step towards an easy home loan journey with us today!