PLR, MCLR & Repo Rates

Repo Rates

To stay relevant in the competitive market, commercial banks used unfair practices for lending money. Ultimately, borrowers want the best deal with the lowest interest rate for higher amounts. In the recent past, the nation's monetary body, the Reserve Bank of India (RBI), has taken some unexpected measures regarding the loan lending rates & its policies. Thus, the measures were compulsory because the fluctuating interest rates of commercial banks were affecting the borrowers and directly or indirectly the country's economy. For this, RBI introduced PLR, MCLR and revised Repo rates to fix those issues & maintain a transparent financial system. So, let's look at them each in detail.

1. Prime Lending Rate

The Prime Lending Rate (PLR) or Prime Rate is the interest rate at which the banks lend money to their creditworthy customers. RBI introduced the Benchmark Prime Lending Rates (BPLR) in 2003 for ensuring the appropriate loan pricing & transparency in the system. As of 2022, India's highest prime rate is 8.80, and it fluctuates between 6.60% to 8.90%, following the individual banks.

a.Significance of PLR
The PLR acts as a reference point for other interest rates such as mortgages, automobile loans, credit cards & more. The prime rate also affects the financial liquidity in the market, and both have an inverse proportionality ratio with each other. If the Prime Lending Rate is decreased, the liquidity is increased & hence easier, meaning the loans becomes affordable & easier to access.

b. How to calculate PLR
The Prime Lending rate is broadly affected by Federal Funds Target Rate or fed funds. The prime rate is fed funds + 3%, meaning if the Federal Funds Target Rate is 2%, then the prime rate will be 5%.


MCLR is the Marginal Cost of Funds Based by Lending Rates was introduced in the Indian financial system by RBI in 2016. MCLR is the minimum interest rate at which banks aren't permitted to lend the loan; however, it is not applicable in some exceptional cases. MCLR is the internal reference to the banks for determining their interest rates on loans.

a.Significance of MCLR
Since MCLR replaced the base rate from the Indian monetary system, the banks' prime customers couldn't take undue advantage. The MCLR depends upon the repo rate issued by the RBI & due to the MCLR implementation, the interest rates involves a lot of respective risks for the individual borrowers.

b. How to calculate MCLR
Banks calculate MCLR based on loan tenor meaning the period that a borrower will take to repay the loan along with interest. Generally, the loan amount & the tenor have a proportionality ratio. For calculating the exact lending rates, the banks consider the following:

• Tenor
• The marginal fund's cost
• Operating costs
• Negative Carry on the CRR (Cash Reserve Ratio)

Given below are one-year MCLR rates for popular banks such as: HDFC: 7.20% ICICI: 7.25% AXIS: 7.40% SBI: 7.00%

3. Repo rate

Repo rate is the interest rate at which the nation's financial body, the Reserve Bank of India (RBI), lends money to the commercial banks when the commercial banks are short of funds. The repo rate is decided by the Monitory Policy Committee (MPC) of RBI, and as of February 2022, the repo rate is 4%.\

a.Significance of Repo rate
The repo rate is a powerful tool to control cash liquidity and money supply. In addition, the repo rate is a robust solution for controlling inflation. The MPC increase in the repo rate prevents the commercial banks from lending money from the RBI, and this docks off the money supply in the market & hence no inflation.

b. How to calculate Repo rate
The MPC of RBI calculates the Repo rate based on inflation & recession in the market.

c. Difference between repo rate & reverse repo rate
The Reverse repo rate is the interest the RBI pays to the commercial banks when the commercial banks deposit additional funds in the Central bank treasury. The repo rate is always higher than the reverse repo rate to keep an eye on inflation. Meanwhile, the reverse repo rate is used for measuring the overall money supply in the economy. As of February 2022, the reverse repo rate is 3.35%.

Difference between PLR, MCLR & Repo rate:

Here is a table for a quick comparison of PLR, MCLR and repo rates based on equal grounds.

Repo Rates Tables