The RBI raised the repo rate by 25 basis points to 5.50% from 5.25% on 7 October 2026, and the new car loan interest rate for floating loans has been moving since then. It is the first increase since February 2023, when the repo rate stood at 6.50%.
Commercial bank loans linked to the repo rate were reset from 8 October, one day after the policy change. Borrowers with floating car loans tied to this benchmark are therefore seeing the higher rate in their loan accounts within days, and many families are checking their loan statements to see the effect on the monthly instalment amount.
The rate offered by each lender on a fresh loan will also depend on the spread that the lender adds to this benchmark.
How banks build the rate
Since 1 October 2019, RBI has made it mandatory for banks to link new floating rate retail loans and MSME loans to an external benchmark. The permitted benchmarks are the policy repo rate, the three month or six month Treasury bill yields published by the Financial Benchmarks India Private Ltd (FBIL), or any other benchmark published by FBIL.
The same circular requires the banks to reset the interest rate on such loans at least once in every three months. Each lender then adds its own spread to the chosen benchmark.
Before this, the banks used the marginal cost of funds based lending rate (MCLR), which the RBI had said transmitted the policy changes poorly to the borrowers. Borrowers whose floating rate loans allow prepayment without penalty can switch to an external benchmark.
What the August 2026 draft proposes
As per reports on the draft, it proposes the following:
- All floating rate personal and MSME loans from commercial banks will use an external benchmark.
- The benchmark reset period for most floating rate loans will be capped at three months, and no lender can price a loan below the applicable benchmark.
- Existing benchmark linked loans will get until 1 April 2029 to move to the new framework.
The next MPC resolution is scheduled for 2 to 4 December 2026 and it will decide whether 5.50% continues.
