RLLR vs. MCLR vs. Base Rate: How Indian Home Loan Interest Rates Are Fixed

In October 2019, the Reserve Bank of India introduced a transformative regulatory mandate: all commercial banks were required to link all new floating-rate personal and retail loans to an External Benchmark Lending Rate (EBLR), with the vast majority adopting the RBI Repo Rate (RLLR).

Prior to this, banks utilized internal benchmarks known as MCLR (Marginal Cost of Funds based Lending Rate) and earlier Base Rate. If you took your home loan before October 2019 and have never requested a conversion, you are likely still pegged to MCLR and overpaying substantially.

How RLLR Works: The Anatomy of Modern Home Loan Pricing

Under the RLLR framework, your final home loan interest rate is determined by a simple transparent equation:

• RBI Repo Rate: The rate at which the central bank lends short-term liquidity to commercial banks. When the Monetary Policy Committee (MPC) alters the repo rate, your loan rate must adjust by the exact same margin within a mandatory 3-month reset window.
• Bank Spread: The fixed margin charged by the bank to cover operating costs and net interest margin (typically 2.0% to 2.25%).
• Credit Risk Spread: Additional basis points added if your CIBIL score is below 750 or if your loan-to-value ratio exceeds standard thresholds.

Why MCLR Was Unfavorable for Borrowers

Under the older MCLR regime, when the RBI cut policy rates, banks were notoriously sluggish to pass on rate cuts to borrowers, claiming their internal cost of term deposits had not yet declined. However, when the RBI increased rates, banks raised MCLR almost immediately!

External benchmarking under RLLR eliminated this asymmetry. Rate cuts decided in Mumbai by the RBI are legally required to translate directly into your lower EMI.

How to Switch from MCLR to RLLR

If your loan is still tied to MCLR, submit a formal conversion request letter to your home branch. Under RBI guidelines, banks are required to permit borrowers to transition from internal to external benchmarks upon payment of a nominal administrative fee without any penalty.