A floating-rate loan has an interest rate that adjusts periodically based on movements in an underlying benchmark — typically the repo rate under the RBI’s October 2019 external-benchmark mandate. The bank’s lending rate is expressed as benchmark + spread, where the spread is fixed at sanction and the benchmark resets at agreed intervals.
When the benchmark rate rises, the borrower’s EMI (or tenure) increases; when it falls, the EMI (or tenure) decreases. For new home, personal, and MSME loans, banks reset the rate at least quarterly.
The alternative is a fixed-rate loan — the rate stays constant for the full tenure, but is typically priced higher than the prevailing floating rate.