RLLR vs MCLR – Meaning and Key Differences

• RLLR links loans directly to the RBI repo rate, ensuring immediate, transparent interest rate changes whenever the central bank revises policy rates, with calculations simply being the repo rate plus a fixed bank spread.

• MCLR is based on banks’ internal cost calculations, including marginal funding cost, CRR carry, operating expenses, and tenor premium, leading to delayed or partial transmission of RBI rate changes.

• RLLR provides faster benefits during rate cuts and quicker hikes during tightening cycles, while MCLR rates change only at scheduled reset periods, offering short-term EMI stability but slower reductions.

In India’s evolving lending ecosystem, borrowers have often struggled to understand why loan interest rates fail to fall quickly when the Reserve Bank of India (RBI) cuts its policy rates. To address this issue and ensure faster transmission of monetary policy, the RBI has introduced different lending benchmark systems over time. Among them, the two most widely discussed frameworks are the Marginal Cost of Funds-based Lending Rate (MCLR) and the Repo Linked Lending Rate (RLLR). While both aim to standardise bank lending rates, they differ significantly in structure, responsiveness, transparency, and borrower benefits.

RLLR, or Repo Linked Lending Rate, is the interest rate benchmark directly tied to the Reserve Bank of India’s (RBI) repo rate, and it is calculated by adding a spread or margin determined by the bank to the prevailing repo rate.

This mechanism ensures that whenever the RBI changes the repo rate, the rate at which it lends short-term funds to commercial banks, the lending rates for loans such as home loans, personal loans, and other retail credit products automatically adjust, making RLLR a transparent and market-driven benchmark.

The calculation of RLLR is straightforward: RLLR = RBI Repo Rate + Bank Spread. The RBI fixes the repo rate, while individual banks determine the spread based on factors such as the borrower’s risk profile, loan-to-value ratio, and operational costs. For example, suppose the RBI repo rate is 6.50% and a bank decides to keep a 2.00% spread for a particular category of home loan. In this case, the RLLR will be 8.50% (6.50% + 2.00%). If the RBI reduces the repo rate by 0.25%, the RLLR will automatically fall to 8.25%, thereby reducing the borrower’s Equated Monthly Instalment (EMI).

Let's take a hypothetical example to explain this better:

Suppose a borrower takes a home loan of ₹50 lakh at an RLLR of 8.50% for 20 years. The EMI would be approximately ₹43,391. Now, if the RBI cuts the repo rate by 0.25%, the RLLR drops to 8.25%. The new EMI becomes ₹42,568, saving the borrower about ₹823 per month. Over the course of a year, this translates into savings of nearly ₹9,876, and over the entire loan tenure, the borrower could save lakhs of rupees. This example highlights how RLLR directly links loan costs to changes in monetary policy.

Here are the three key components of a bank spread:

Credit Risk Premium

The credit risk premium reflects the borrower’s risk profile and repayment capacity. Banks assess factors such as credit score, employment stability, collateral quality, and sectoral risks before assigning this premium. A borrower with strong repayment history and low leverage will face a lower premium, while high-risk borrowers attract higher spreads.

Business Strategy Margin

Beyond risk and cost considerations, banks include a business strategy margin to align lending rates with their competitive positioning. This margin reflects the bank’s appetite for market share, profitability targets, and sectoral focus. For instance, a bank aggressively targeting retail housing loans may keep this margin lower to attract customers, while another focusing on corporate lending may set higher margins.

Loan-to-Value (LTV) Adjustment

The loan-to-value adjustment is applied particularly in secured lending, such as housing loans. Banks assess the ratio of the loan amount to the value of the collateral property. A higher LTV ratio implies greater risk for the bank, as the collateral cushion is thinner. Consequently, spreads increase for high LTV loans, while lower LTV borrowers benefit from reduced margins.

Here are some parameters that impact the repo rate:

Headline Inflation Trends

The Monetary Policy Committee (MPC) closely monitors headline inflation, particularly food and fuel prices, before deciding on changes to the repo rate. When inflation falls sharply, as seen in October 2025, when consumer inflation dropped to 0.25% due to easing food prices and GST rate cuts, the central bank gains room to reduce rates to stimulate demand.

GDP Growth Momentum

Strong GDP growth often reduces the need for aggressive monetary easing, while weak growth compels rate cuts. In late 2025, resilient GDP growth created uncertainty for policymakers: cutting rates risked overheating, while maintaining them risked slowing consumption. The MPC weighs quarterly GDP data to assess whether monetary policy should lean towards supporting expansion or cooling demand.

Liquidity Conditions

Repo rate decisions are influenced by systemic liquidity. When liquidity is abundant, lowering the repo rate may have a limited impact, while tightening liquidity requires rate adjustments to stabilise borrowing costs.

Global Monetary Policy Shifts

Global central banks’ actions, particularly the US Federal Reserve, shape the RBI’s repo rate stance. If global rates rise, maintaining lower domestic rates risks capital outflows and currency depreciation. Conversely, global easing cycles provide space for domestic rate cuts.

Bond Yield Movements

Bond yields reflect investor expectations of inflation and monetary policy. Sharp yield drops, as seen in November 2025 when markets priced in a December rate cut, signal confidence in easing. Conversely, rising yields may force the MPC to tighten policy to prevent disorderly market conditions.

Also Read: A Guide To Understand Repo Linked Lending Rate (RLLR)

The Marginal Cost of Funds-based Lending Rate (MCLR) represents the internal benchmark used by banks to decide lending rates for loans such as home loans, personal loans, and corporate borrowings. It is the minimum interest rate below which banks in India cannot lend. The Reserve Bank of India introduced MCLR in April 2016.

The calculation of MCLR involves several components, including the marginal cost of funds, negative carry on CRR, operating costs, and tenor premium. This accounts for the risk associated with longer-term lending.

Banks compute MCLR for different tenors, overnight, one month, three months, six months, one year, and beyond, ensuring borrowers have clarity on how their loan interest rates are determined.

For example, suppose a bank has the following cost structure: a marginal cost of funds of 7.50%, a negative carry on CRR of 0.10%, an operating cost of 0.20%, and a tenor premium for a one-year loan of 0.25%. The one-year MCLR would be calculated as 7.50% + 0.10% + 0.20% + 0.25% = 8.05%. This means that for a one-year loan, the bank cannot lend below 8.05%, though it may add a spread depending on the borrower’s risk profile.

To illustrate further, if a borrower takes a home loan linked to the one-year MCLR of 8.05% with a spread of 0.50%, the effective interest rate becomes 8.55%. Thus, MCLR ensures that lending rates are closely aligned with the bank’s actual funding costs and the RBI’s monetary policy stance, making the system more responsive and fairer than the earlier base rate mechanism.

Here are some of the common components of MCLR:

Marginal Cost of Funds

The marginal cost of funds represents the incremental expense a bank incurs to raise an additional unit of capital. Unlike the average cost of funds, which smooths out historical borrowing costs, the marginal cost is forward-looking and highly sensitive to prevailing market conditions. It includes the cost of deposits (fixed and floating), borrowings from other institutions, and the impact of policy rate changes. Banks must factor in the weighted average cost of fresh deposits and borrowings, adjusted for the tenor of liabilities.

Negative Carry on CRR

Cash Reserve Ratio (CRR) mandates banks to hold a fixed proportion of deposits as reserves with the central bank, earning no interest. This creates a “negative carry” because banks forego potential earnings on these funds while still incurring costs to mobilise deposits. In MCLR computation, this negative carry is explicitly recognised to ensure lending rates capture the opportunity cost of idle reserves. For example, if a bank raises deposits at 6% but must park 4% of them in CRR without return, the effective cost of usable funds rises. This adjustment prevents underpricing of loans.

Operating Costs

Operating costs under MCLR are not generic overheads but are specifically linked to loan origination, servicing, and risk management. These include expenses for maintaining branch infrastructure, digital platforms, compliance systems, and credit appraisal mechanisms. Unlike marginal cost or CRR adjustments, operating costs are bank-specific and vary depending on efficiency, scale, and technology adoption. Regulators mandate that only costs directly attributable to lending activity be included, preventing banks from inflating MCLR through unrelated expenditure.

Tenor Premium

Tenor premium accounts for the risk and uncertainty associated with lending over longer durations. Short-term loans expose banks to limited interest rate volatility, whereas long-term loans lock funds for extended periods, increasing exposure to inflation, policy shifts, and credit risk. To compensate, banks add a tenor premium to MCLR, which rises with loan maturity. This premium is not arbitrary; it is calculated based on the maturity profile of liabilities and the risk-adjusted return expectations. For instance, a one-year loan may carry minimal premium, while a five-year loan requires a higher buffer to safeguard against rate fluctuations.

Here are some key distinctions between RLLR vs MCLR:

RLLR and MCLR represent two distinct approaches to loan pricing in India, each shaping how quickly borrowers experience changes in interest rates. RLLR’s direct linkage to the RBI repo rate ensures transparency and immediate transmission, allowing borrowers to benefit instantly from rate cuts and feel hikes just as fast. MCLR, rooted in banks’ internal cost structures and reset cycles, offers steadier short-term EMIs but often delays the benefits of easing policy rates. For most new borrowers seeking clarity and quicker monetary policy impact, RLLR has become the more borrower-friendly benchmark. Ultimately, understanding both systems enables borrowers to choose loan structures aligned with their cash-flow stability, risk tolerance, and long-term repayment goals.

Also read: MCLR (Marginal Cost of Funds Based Lending Rate)