Floating Interest Rate

Definition

A floating rate changes with the benchmark lending rate. Since Oct 2019, all new bank floating-rate loans must link to an external benchmark most use the repo rate via EBLR (External Benchmark Lending Rate). Floating Rate = Benchmark + Spread. For example: 6.5% repo + 2.5% spread = 9%.

When the RBI changes repo rate, EMIs or tenure adjust within 1-3 months. Lenders must reset at least quarterly. Floating rates are typically 1-2% lower than fixed rates, making them popular. However, borrowers face uncertainty — EMIs can increase if rates rise.

Frequently Asked Questions

How often does a floating rate change? ▾

Lenders must reset EBLR-linked rates at least quarterly. In practice, most adjust within 1-3 months of an RBI repo rate change.

Will my EMI change? ▾

Yes, when rates change. Lenders either adjust EMI (keeping tenure) or adjust tenure (keeping EMI). You can usually choose which.

Is floating better than fixed? ▾

Historically, floating rates have averaged lower over long tenures in India. But they carry more uncertainty. The best choice depends on your risk tolerance and market outlook.

Why It Matters

Most loans in India are floating-rate. Understanding the mechanism helps borrowers anticipate EMI changes and decide if the lower starting rate is worth the variability risk.

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