MCLR vs Repo Rate: The Complete Guide for Borrowers in India

Introduction: Why This Topic Matters

If you’ve ever taken a home loan, car loan, or even a personal loan in India, you’ve probably noticed your Equated Monthly Instalment (EMI) go up or down mysteriously after RBI announcements. Maybe your banker told you your loan was linked to MCLR. Later, you read in the news that RBI had cut the Repo Rate, but your EMI didn’t budge for months.

Confusing, right?

That’s exactly why this topic matters. Whether you’re a first-time borrower or a seasoned investor managing multiple loans, understanding the difference between MCLR and Repo Rate can save you thousands of rupees over the life of a loan.

In this post, we’ll break it all down — no jargon overload, no dry economics lecture. By the end, you’ll know:

• What exactly the Repo Rate and MCLR are.
• How they evolved in India’s banking system.
• Why EMIs don’t always change instantly with RBI announcements.
• The real difference between MCLR-linked and Repo Rate-linked (EBLR) loans.
• Practical strategies to decide whether you should stick with your current loan or switch.

Think of it as a crash course in decoding the RBI’s influence on your wallet.

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Quick Summary Before We Dive In

Here’s the TL;DR of what you’ll learn:

• Repo Rate = RBI’s main tool to control inflation and liquidity. It’s the rate at which banks borrow money from the RBI.
• MCLR (Marginal Cost of Funds-based Lending Rate), or what is MCLR in simple terms, = An internal benchmark each bank used (2016–2019) to decide how much to charge you for loans. It made things more transparent than the old Base Rate but was still slow to respond to Repo Rate cuts.
• EBLR (External Benchmark Lending Rate) = Since 2019, most new loans are directly linked to the Repo Rate or another external benchmark, making loan rates more transparent and responsive.

👉 Understanding MCLR vs Repo Rate is crucial because the real story is not just MCLR vs Repo Rate, but the transition from Base Rate → MCLR → Repo Rate-linked EBLR.

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1: The Repo Rate – RBI’s Big Steering Wheel

Imagine India’s economy is like a giant ship. The Repo Rate is one of the levers the Reserve Bank of India (RBI) uses to steer it.

• Definition: Repo Rate is the interest rate at which the RBI lends money to commercial banks for short-term needs.
• How it works: Banks sell government securities to RBI with an agreement to buy them back later at a slightly higher price. That difference = interest, i.e., the Repo Rate.

📊 Quick Example:

• If Repo Rate = 6%, banks borrow at 6%.
• If RBI hikes Repo Rate to 6.5%, borrowing becomes more expensive → banks raise lending rates → your loan EMI may go up.

👉 Why it matters for you: Whenever RBI tweaks this rate, it sends ripples through the economy — from your home loan EMI to FD interest rates.

💬 Expert voice: “Think of the Repo Rate like a thermostat for the economy. Raise it, and things cool down (inflation). Lower it, and things heat up (growth).” — Raghav Mehta, Banking Analyst (LinkedIn post, 2024)

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2: The Old Days – Base Rate (2010–2016)

Before MCLR, banks used the Base Rate system.

• It was calculated using a bank’s average cost of funds, operating expenses, and a fixed return margin.
• But it was too rigid and opaque.
• When RBI cut Repo Rates, banks often didn’t pass on the benefit quickly.

⚠️ Common frustration back then: Borrowers saw headlines like “RBI cuts Repo Rate by 50 bps”, but their EMIs stayed the same for months.

👉 This mismatch in “policy vs reality” is why RBI moved on.

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3: The MCLR Era (2016–2019)

Enter MCLR (Marginal Cost of Funds-based Lending Rate) in April 2016.

• Goal: Make loan pricing more transparent and responsive.
• Formula included:
• Marginal cost of borrowings (92% weight)
• Negative carry on CRR (banks’ cost of idle reserves with RBI)
• Operating costs
• Tenor premium (extra cost for longer loans)

✅ Improvement over Base Rate: At least it was more dynamic and fair. ❌ But still a problem: MCLR was bank-internal and usually reset only every 6–12 months.

📊 Mini-case scenario: Suppose RBI cut Repo Rate in January. Your loan linked to MCLR might only reset in July, meaning you’d pay higher EMIs for 6 months despite cheaper money being available.

💬 Expert misconception: “I thought MCLR was directly linked to Repo Rate. But my EMI didn’t change for almost a year after a rate cut!” — Comment from a borrower on a finance forum, 2018

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4: The Game-Changer – EBLR (2019–Present)

In October 2019, RBI rolled out the External Benchmark Lending Rate (EBLR).

• All new floating-rate loans had to be linked to an external benchmark like:
• RBI’s Repo Rate (most common),
• 91-day/182-day T-Bill yields, or
• Market repo rate.

💡 How it works now: Your loan rate = External benchmark (say, Repo Rate) + Spread (bank’s margin).

👉 This means when RBI changes Repo Rate, your loan adjusts much faster (quarterly reset).

⚖️ The trade-off:

• MCLR loans: Slower changes = more EMI stability.
• EBLR loans: Faster changes = more volatility, but better transparency.

📊 Visual analogy:

• MCLR = Old cable TV (channels updated once a month).
• EBLR = Netflix (new updates appear instantly).

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5: MCLR vs Repo Rate – The Core Comparison

Here’s a side-by-side snapshot:

Feature	MCLR	Repo Rate-linked EBLR
Linked To	Bank’s internal cost of funds	RBI Repo Rate (or other benchmark)
Rate Transmission	Delayed, reset every 6–12 months	Immediate, reset quarterly
Transparency	Moderate (bank decides)	High (public RBI benchmark)
EMI Stability	More stable	More volatile
Best For	People who prefer predictable EMIs	People who want quick benefits of rate cuts

💬 Expert perspective: “EBLR has finally solved the long-standing issue of transmission lag. But borrowers need to be comfortable with more frequent EMI adjustments.” — Anita Rao, Ex-RBI Economist

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6: Practical Implications for Borrowers

So what does this mean for you?

1. EMI Impact

• Under MCLR, a Repo Rate cut takes months to reflect.
• Under Repo-linked loans, your EMI drops (or rises) almost immediately.

2. Strategic Choices

• New borrowers (post-2019): No choice — your loan will be Repo-linked.
• Existing borrowers (pre-2019): You can switch from MCLR to EBLR.

⚠️ Watch out for: Banks may charge a small conversion fee when you switch. But the savings in a falling rate cycle can far outweigh the cost.

📊 Scenario: If you have a ₹50 lakh home loan at 9% MCLR-linked, and Repo Rate drops, switching to a Repo-linked loan at 8.5% could save you ~₹2,500 per month in EMI. Over 10 years, that’s ~₹3 lakh saved!

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7: Borrower’s Decision Matrix

Here’s a simple decision guide:

Scenario	Best Action	Why
You value stable EMIs	Stay with MCLR	Predictable payments, fewer surprises
You expect falling rates	Switch to Repo-linked loan	Quick pass-through of rate cuts
You want full transparency	Repo-linked loan	Public benchmark, no hidden calculations
You’re on old Base Rate	Switch to Repo-linked loan	Much better responsiveness and fairness

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8: Common Myths & Misconceptions

• Myth 1: “Repo Rate cut means my EMI will drop immediately.”
• ✅ True only if you’re on Repo-linked loans. Not for MCLR until reset.
• Myth 2: “Banks always pass on rate cuts fully.”
• ❌ Wrong. Banks may keep a higher spread. Always compare across banks.
• Myth 3: “Repo-linked loans are always better.”
• ⚖️ Not necessarily. If you want EMI stability, MCLR could still suit you.

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Recap Checklist

Here’s what you should remember:

• ✅ Repo Rate = RBI’s policy lever.
• ✅ MCLR = Bank-internal benchmark (2016–2019), slower transmission.
• ✅ EBLR (Repo-linked loans) = Transparent, faster, but more volatile.
• ✅ For new loans → you’re already on Repo-linked.
• ✅ For old loans → consider switching to benefit from transparency.

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Bonus Tips for Advanced Readers

• Compare spreads across banks, not just Repo Rate linkage.
• Watch out for reset dates — knowing when your EMI will change helps plan your cash flow.
• If rates are expected to rise, fixing your loan (if offered) can save you from EMI shocks.

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Conclusion: Your Takeaway

The evolution from Base Rate → MCLR → Repo-linked lending is really the story of RBI making its monetary policy faster, fairer, and more transparent.

For borrowers, the big win is this: you’re no longer at the mercy of your bank’s slow adjustments. Your loan now moves in step with the economy.

Yes, Repo-linked loans may feel like a roller coaster with EMIs rising and falling more often. But as long as you understand the mechanism, you can make smarter decisions — whether it’s timing a switch, renegotiating your spread, or simply planning your household budget better.

✨ Once you master this, you’ll find managing loans far less stressful — and maybe even a little empowering.