The MPC can change the repo rate in a single morning, but households and firms never borrow at the repo rate. What matters is how far and how fast the change reaches the rates they actually pay and earn: home-loan and MSME loan rates, fixed-deposit rates, Treasury bill and bond yields, and the rupee. That journey is called monetary transmission. Part 3 listed the five channels in outline. This part goes deeper. It traces how India's lending-rate system moved from the PLR to the external benchmark, measures pass-through using the RBI's own data for the 2022–23 tightening and the 2025 easing, explains why transmission in India is slower than in many economies, and follows the first days of transmission after the hike of 7 October 2026. The mechanics of the repo rate and the corridor are in Part 4.
In the news
- 15 Oct 2026: SBI raises its external benchmark rates by 25 bp. SBI's EBLR rose from 7.90% to 8.15% (plus credit risk premium and business strategy premium) and its RLLR from 7.50% to 7.75%. It also raised its 3-month to 1-year MCLR by 15 bp, but left fixed-deposit rates unchanged. Why it matters for the exam: the full 25 bp reached repo-linked loans within eight days, MCLR loans got only part of it, and deposits got none at first.
- 8 Oct 2026: Public sector banks pass the hike to repo-linked loans the next day. PNB raised its RLLR from 8.10% to 8.35%, Bank of Baroda its repo-based rate from 7.90% to 8.15%, and Indian Bank from 7.95% to 8.20%. Bank of India and Indian Overseas Bank moved to 8.35%. PNB left its MCLR and base rate unchanged. Why it matters for the exam: this is the external benchmark system working as designed: a mechanical, one-for-one move.
- 7 Oct 2026: Monetary Policy Report measures the 2025 easing. The October MPR found that after 125 bp of repo cuts, the weighted average lending rate (WALR) had fallen 72 bp on fresh loans and 91 bp on outstanding loans, and term-deposit rates 95 bp on fresh and 53 bp on outstanding deposits (February 2025 to August 2026). It also noted small savings rates had been left unchanged for 11 consecutive quarters. Why it matters for the exam: these are the latest official transmission numbers and are likely to be asked.
- 7 Oct 2026: Repo rate raised to 5.50%. The MPC raised the repo rate by 25 bp and moved to a calibrated tightening stance. The Governor said the call rate had been trading 14 bp below the repo rate on average since the August policy, and that the RBI would try to align it with the repo rate. Why it matters for the exam: a rate hike achieves little if surplus liquidity keeps market rates below the policy rate.
- 5 Jun 2026: Measures to attract capital inflows. The RBI announced a forex swap facility bearing the full hedging cost for banks raising fresh 3–5-year FCNR(B) deposits, among other steps, after net FPI outflows of US$13.7 billion. The resulting inflows added substantially to rupee liquidity. Why it matters for the exam: exchange-rate management and liquidity are tied together, and liquidity affects transmission.
- 5 Dec 2025: Last cut of the easing cycle, backed by liquidity. The MPC cut the repo rate by 25 bp to 5.25%, taking the 2025 easing to 125 bp. The RBI also announced ₹1 lakh crore of OMO purchases and a three-year US$5 billion buy/sell swap. Why it matters for the exam: the RBI adds durable liquidity to help rate cuts reach loans and deposits.
What transmission means
Transmission is a chain of links. Each link has its own speed and its own leakages:
- Policy rate to money market. The repo rate and the LAF corridor pull the overnight weighted average call rate (WACR), the RBI's operating target, towards the repo rate. This takes a day or two.
- Money market to other market rates. Treasury bill, certificate of deposit (CD), commercial paper (CP) and government bond yields adjust. Short rates move within days; long bond yields depend on expectations, government borrowing and global yields.
- Market rates to bank rates. Banks change their lending benchmarks and deposit rates. This is the slowest and most debated link in India.
- Bank and market rates to spending. Higher borrowing costs and better returns on saving change consumption, investment and credit growth.
- Spending to inflation. Lower demand eases price pressure, usually over several quarters.
Economists measure the third link with pass-through: the change in a bank rate divided by the change in the repo rate. A 25 bp repo hike that raises a lending rate by 20 bp shows 80% pass-through.
From PLR to EBLR: why the lending benchmark kept changing
Before 1994 the RBI fixed lending rates directly. Since deregulation, each new lending-rate system was introduced because the previous one was failing to transmit policy changes.
| Regime | When | How the rate was set | Why it was replaced |
|---|---|---|---|
| Prime Lending Rate (PLR) | October 1994 | Each bank declared a PLR for loans above ₹2 lakh | Rigid; moved little with market rates |
| Benchmark PLR (BPLR) | 2003 | PLR turned into a reference rate; lending below it meant to be marginal | Most lending was below BPLR, so it stopped being a benchmark |
| Base rate | 1 July 2010 | Minimum rate based on each bank's own cost of funds | Banks' choice of cost-of-funds method made it opaque and slow |
| MCLR | 1 April 2016 | Formula based on marginal cost of funds, CRR cost, operating cost and tenor premium | Still internal; banks adjusted spreads; resets long |
| External benchmark (EBLR) | 1 October 2019 | Rate = an external benchmark (mostly repo) + a spread | Current system for retail and MSME floating loans |
PLR and BPLR (1994–2010)
When lending rates for loans above ₹2 lakh were deregulated in October 1994, banks had to declare a prime lending rate. In practice the PLR was "rigid and inflexible" and varied widely across banks. In 2003 banks were told to introduce a benchmark prime lending rate (BPLR). The idea was that the BPLR would be the rate for the best borrowers. Instead, large corporates negotiated loans well below it: about 77% of banks' loan portfolios were at sub-BPLR rates in March 2007. Since actual rates had no fixed link to the benchmark, a policy change did not reliably reach borrowers.
The base rate (2010)
The Working Group on Benchmark Prime Lending Rate, chaired by Deepak Mohanty, reported on 20 October 2009. It found that the BPLR had lost touch with market conditions and recommended a base rate, a minimum rate below which banks could not lend (with a few exceptions). The base rate came into force on 1 July 2010. But each bank could choose its own method for the cost of funds, and most used the average cost of all funds, which moves very slowly. The RBI later concluded that the base rate system was opaque and slow to respond to policy.
MCLR (2016)
The RBI's final guidelines of 17 December 2015 introduced the marginal cost of funds based lending rate (MCLR) for all rupee loans sanctioned or renewed from 1 April 2016. The MCLR has four components:
- the marginal cost of funds (the rate on new deposits and borrowings, plus return on net worth);
- the negative carry on CRR, since CRR balances earn nothing;
- operating costs;
- a tenor premium for longer loans.
Banks publish MCLRs for overnight, one-month, three-month, six-month and one-year tenors (and sometimes longer) every month. The one-year MCLR is the usual benchmark for home loans. Because the marginal cost of funds reacts faster than the average, MCLR was an improvement. But it was still an internal benchmark, built from deposit rates the bank itself set. Banks could also change the spread over MCLR, often, in the RBI's words, "in an arbitrary manner". And many loans reset only once a year.
The Janak Raj study group and the external benchmark (2019)
An Internal Study Group chaired by Dr Janak Raj, whose report was released on 4 October 2017, concluded that internal benchmarks such as the base rate and MCLR "have not delivered effective transmission". It recommended moving to an external benchmark such as the T-bill rate, the CD rate or the repo rate, with spreads fixed for the life of the loan and quarterly resets.
After an announcement in December 2018 and further consultation, the RBI's circular of 4 September 2019 required that all new floating rate personal or retail loans (housing, auto and so on) and floating rate loans to micro and small enterprises from 1 October 2019 be linked to one of:
- the RBI's policy repo rate;
- the Government of India 3-month Treasury bill yield published by FBIL;
- the 6-month Treasury bill yield published by FBIL;
- any other benchmark market rate published by FBIL.
The other rules matter as much as the benchmark:
- Reset at least once every three months.
- One benchmark per loan category in each bank, for transparency.
- Spread: the bank sets it, but the credit risk premium can change only if the borrower's credit assessment changes substantially, and other components (such as operating cost) only once in three years.
- Existing loans on MCLR, base rate or BPLR continue until repayment or renewal. Eligible borrowers can switch to the external benchmark without charges, apart from reasonable administrative or legal costs.
Medium enterprises were added from 1 April 2020. Almost all banks chose the repo rate, which is why the external benchmark is usually called the repo-linked lending rate (RLLR) or repo-based lending rate (RBLR). EBLR is the general term; RLLR and RBLR are names individual banks use for their repo-linked versions.
Protecting EMI borrowers (2023)
During the 2022–23 tightening many borrowers found that banks had silently extended their loan tenure, sometimes by decades. The RBI's circular of 18 August 2023 on the reset of floating interest rates on EMI-based personal loans requires lenders to explain at sanction how a change in the benchmark affects the EMI and tenure, to inform borrowers immediately of any increase, to let them choose between a higher EMI, a longer tenure or both, and to allow prepayment. Lenders may also offer a switch to a fixed rate at reset, under a board-approved policy. Faster transmission, in other words, came with a duty to explain it.
How much of the book is on each benchmark
The external benchmark applies only to new floating loans in specified categories, so its share of the stock has grown gradually as old loans were repaid and new ones made. The RBI reports the share of each benchmark in the outstanding floating rate rupee loans of scheduled commercial banks:
| End of | EBLR | MCLR | Others (base rate, BPLR) |
|---|---|---|---|
| March 2020 | 9.1% | 78.3% | 12.6% |
| March 2022 | 44.0% | 48.7% | 7.3% |
| March 2024 | 56.6% | 39.2% | 4.2% |
| December 2024 | 60.6% | 35.9% | 3.5% |
| March 2026 | 67.6% | 30.2% | 2.2% |
| June 2026 | 68.2% | 29.6% | 2.2% |
The figure for "others" in 2026 is the remainder (100 minus EBLR and MCLR).
The average hides a big difference between bank groups. At end-June 2026 the EBLR share was 94.7% for foreign banks, 90.8% for private banks but only 53.6% for public sector banks. PSBs still price much of their agriculture, infrastructure, large-industry and other personal loans off the MCLR. The October 2026 MPR concluded that "the MCLR and other legacy rates – based on internal benchmarks and with longer reset periods – act as an impediment to faster policy transmission".
Transmission in two cycles: what the data show
The RBI tracks four rates every month:
- WALR on fresh rupee loans: the average rate on loans sanctioned in the month;
- WALR on outstanding rupee loans: the average rate on the whole loan book;
- WADTDR on fresh deposits: the weighted average domestic term deposit rate on new deposits;
- WADTDR on outstanding deposits: the average on all term deposits.
The October 2026 Monetary Policy Report compares the last two cycles (Table II.7, changes in basis points):
| Tightening (May 2022 to Jan 2025) | Easing (Feb 2025 to Aug 2026) | |
|---|---|---|
| Policy repo rate | +250 | −125 |
| EBLR | +250 | −125 |
| 1-year MCLR (median) | +175 | −39 |
| WALR, fresh loans | +182 | −72 |
| WALR, outstanding loans | +115 | −91 |
| WADTDR, fresh deposits | +259 | −95 |
| WADTDR, outstanding deposits | +206 | −53 |
The easing cycle covers the four cuts on 7 February, 9 April, 6 June (50 bp) and 5 December 2025. Rates were held from then until October 2026, so the window to August 2026 includes eight months in which the lagged effects kept working through.
Worked example 1: pass-through ratios
Divide each change by the repo change.
| Tightening (÷ 250) | Easing (÷ 125) | |
|---|---|---|
| Fresh WALR | 182 ÷ 250 = 72.8% | 72 ÷ 125 = 57.6% |
| Outstanding WALR | 115 ÷ 250 = 46.0% | 91 ÷ 125 = 72.8% |
| Fresh WADTDR | 259 ÷ 250 = 103.6% | 95 ÷ 125 = 76.0% |
| Outstanding WADTDR | 206 ÷ 250 = 82.4% | 53 ÷ 125 = 42.4% |
Three lessons stand out.
- The outstanding loan book now moves faster than before. In the tightening, outstanding WALR captured less than half the hike. In the easing, it captured nearly three-quarters of the cut, more than fresh loans did. The reason is the rising EBLR share: when two-thirds of floating loans are repo-linked, they reset automatically within three months.
- Deposit rates rose more than 100% on fresh deposits during tightening. Credit grew faster than deposits in 2022–24, so banks competed hard for funds, particularly bulk deposits, and raised fresh deposit rates by more than the repo increase. In the easing, the same competition and high small savings rates slowed the fall.
- Fresh lending rates fell less than the cut. Strong credit demand allowed banks to keep margins. Private banks raised their spreads over the repo rate on EBLR loans, for example from 2.44 to 2.69 percentage points on housing loans between January 2025 and August 2026. The RBI also separates the interest rate effect from a composition effect (a change in the mix of loans). At constant January 2025 weights, fresh WALR fell 76 bp, so the change in loan mix explains only about 4 bp.
Worked example 2: why the outstanding WALR fell about 91 bp
Treat the outstanding floating loan book in June 2026 as 68.2% EBLR, 29.6% MCLR and 2.2% other, and assume EBLR loans fully passed on the 125 bp cut, MCLR loans moved with the median 1-year MCLR (−39 bp) and other loans did not move.
- EBLR contribution: 0.682 × 125 = 85.3 bp
- MCLR contribution: 0.296 × 39 = 11.5 bp
- Others: 0.022 × 0 = 0 bp
- Expected fall: 85.3 + 11.5 = about 97 bp
The actual fall was 91 bp. The gap reflects fixed-rate loans (not in the floating book), changes in spreads and the shifting loan mix. The simple sum shows that the benchmark mix, more than anything else, explains how quickly the loan book reprices.
Worked example 3: the reversal in 2026
The MPR also reports changes in H1:2026-27 (April to August 2026): fresh WALR +21 bp, outstanding WALR −3 bp, fresh WADTDR −40 bp, outstanding WADTDR −6 bp. Subtracting these from the cumulative figures gives the approximate position at end-March 2026:
- Fresh WALR: −72 − (+21) = −93 bp
- Outstanding WALR: −91 − (−3) = −88 bp
- Fresh WADTDR: −95 − (−40) = −55 bp
- Outstanding WADTDR: −53 − (−6) = −47 bp
So by March 2026 fresh lending rates had fallen by about 93 bp, but they then rose by 21 bp in April to August 2026 while the repo rate did not change. Funding pressure from credit growing faster than deposits was pushing rates up well before the October hike. Over the same months, deposit transmission strengthened, mostly in bulk deposit rates, which fell as liquidity surged; fresh retail deposit rates actually rose 13 bp.
The October 2026 hike: transmission in real time
The 25 bp hike on 7 October 2026 is a live test of each link.
| Rate | What happened | Pass-through so far |
|---|---|---|
| EBLR/RLLR at PNB, Bank of Baroda, Indian Bank, Bank of India, IOB | Up 25 bp, effective 8 October | 100%, next day |
| SBI EBLR and RLLR | 7.90% → 8.15% and 7.50% → 7.75%, effective 15 October | 100%, in eight days |
| SBI MCLR (3-month to 1-year) | Up 15 bp; 1-year 8.70% → 8.85% | 60% on the benchmark; borrowers feel it only at their reset date |
| PNB MCLR and base rate | Unchanged | 0% so far |
| SBI fixed-deposit rates | Unchanged | 0% so far |
Note the arithmetic of the repo-linked rates. SBI's EBLR of 8.15% is the repo rate of 5.50% plus a bank spread of 2.65 percentage points, and Bank of Baroda's new rate of 8.15% implies the same 2.65-point spread. Because the spread is fixed, the benchmark rises exactly as much as the repo rate.
Worked example 4: the same hike, two borrowers
Two borrowers each owe ₹40 lakh on floating rate home loans.
Borrower A (EBLR). Her rate is SBI's EBLR plus a credit risk premium. Assume a premium of 0.35%, so her rate was 7.90% + 0.35% = 8.25% before 15 October and 8.15% + 0.35% = 8.50% after. At her next quarterly reset the extra interest is roughly ₹40,00,000 × 0.25% = ₹10,000 a year, or about ₹833 a month at the start.
Borrower B (MCLR). Her loan is priced at the 1-year MCLR plus 0.20%, with an annual reset in April. Her rate stays at 8.70% + 0.20% = 8.90% until April 2027. At that point, if the MCLR is still 8.85%, her rate becomes 9.05%: a 15 bp rise, roughly ₹40,00,000 × 0.15% = ₹6,000 a year, starting about six months later than A's.
The same policy action therefore reaches A in full within three months and B only partly and with a delay. That is the transmission gap between private banks (mostly EBLR) and public sector banks (still about half MCLR) in miniature. (The premium and spread here are illustrative; the benchmark rates are SBI's actual ones.)
Lags: how long each link takes
- Days. The call rate and other overnight rates move with the corridor almost immediately, provided liquidity is close to neutral. Short T-bill and CD yields react within days, often before the decision if the market expects it.
- Up to three months. EBLR loans must reset at least once a quarter. As the October 2026 examples show, banks often move their benchmark within a day.
- Up to a year. MCLR loans reset on their own reset dates, commonly once a year, and the MCLR itself moves only as deposit costs change.
- Until maturity. A three-year fixed deposit keeps its rate for three years, so outstanding deposit rates and banks' cost of funds adjust slowly.
- Six to eighteen months. Box II.2 of the October 2026 MPR cites a documented 6 to 18 month transmission lag in Indian banking. Its estimates show that after an unexpected easing, aggregate non-food credit rises by about 0.5 percentage points within six months and peaks at about 0.8 points around 13 months, fading by the 15th month. Peaks differ by sector: around 10 months for industry and personal loans, 13 for services and 18 for agriculture.
These lags are why the MPC sets policy on projected inflation. In October 2026 it acted against inflation projected at about 5.8% over the next three quarters, not against the 5.54% of September.
Why transmission is slower in India
Legacy internal benchmarks
Nearly 30% of floating loans are still on the MCLR and about 2% on the base rate or BPLR. Public sector banks, which hold a large share of the loan market, are the main users. Their MCLR depends on their own deposit costs, which move slowly.
The deposit side: term deposits and competition
Indian banks fund themselves mainly through term deposits at fixed rates. When the repo rate falls, banks cannot cut rates on existing deposits, so their cost of funds falls only as deposits mature. Banks are reluctant to cut lending rates faster than their funding costs. When credit grows faster than deposits, as in 2022–24 and again in 2026, banks compete for deposits and resist cutting deposit rates even in an easing.
Small savings schemes
Government small savings rates are meant to follow G-sec yields of similar maturity plus a fixed spread (under a February 2016 formula). In practice the government has often held them. The October 2026 MPR notes they have been unchanged for 11 consecutive quarters, including Q3:2026-27. With G-sec yields lower, the gap is large:
| Scheme | Formula rate | Rate announced | Gap |
|---|---|---|---|
| 1-year Post Office time deposit | 5.62% | 6.9% | +128 bp |
| 3-year time deposit | 6.03% | 7.1% | +107 bp |
| 5-year time deposit | 6.69% | 7.5% | +81 bp |
| Senior Citizens Savings Scheme | 7.44% | 8.2% | +76 bp |
| Public Provident Fund | 7.22% | 7.1% | −12 bp |
If banks cut their one-year deposit rate far below 6.9%, savers can move to post office deposits. The RBI warns that the gap "may be limiting the transmission of policy rates to banks' deposit rates, especially during policy easing".
Government borrowing
The government is the largest borrower in the bond market. Heavy borrowing keeps long-term G-sec yields higher than policy alone would imply, and banks hold large amounts of government bonds (the SLR is 18% of NDTL), so G-sec yields affect what banks expect to earn on alternatives to lending. In H1:2026-27 the weighted average yield on the Centre's new borrowing rose to 7.0% from 6.6% a year earlier, even though the repo rate was 125 bp lower. Long yields respond to fiscal supply and global rates as well as the repo rate.
Liquidity conditions
The corridor keeps the call rate between the SDF and the MSF, but liquidity decides where inside it. In a large surplus, the call rate sinks towards the SDF rate, making money cheaper than the repo rate intends; in a deficit it rises towards the MSF. Either way, the effective policy rate differs from the announced one. The next section explains how.
The role of liquidity
Liquidity is the hinge between the policy rate and market rates. The RBI's operating target is the WACR, and the revised liquidity framework of September 2025 aims to keep it close to the repo rate.
Recent episodes show both directions:
- Supporting the 2025 easing. Alongside its cuts, the RBI reduced the CRR from 4% to 3% in four tranches (September to November 2025) and announced ₹1 lakh crore of OMO purchases and a US$5 billion buy/sell swap in December 2025. Ample liquidity let money-market rates fall quickly, which the RBI wanted.
- Undermining the 2026 tightening. Capital inflows under the RBI's special swap facilities lifted liquidity sharply in mid-2026. Average daily net absorption under the LAF rose to ₹3.21 lakh crore in H1:2026-27 from ₹1.43 lakh crore in H2:2025-26, and the WACR traded on average 14 bp below the repo rate between the August and October meetings. Bulk deposit rates fell "on account of a surge in liquidity". With money that cheap, a rate hike would not have bitten. So the RBI ran 55 VRRR auctions and sold ₹1.0 lakh crore of securities through OMOs from August, and in October said it would "strive to align" the WACR with the repo rate. From the fortnight starting 16 October 2026 banks must also maintain 99% of their required CRR every day, up from 90%.
The details of the corridor tools are in LAF and MSF and open market operations and liquidity.
The bond market and T-bill channel
Market rates usually move faster than bank rates because they are repriced every day.
- Treasury bills. The 3-month T-bill rate tracks the repo rate closely; in H1:2026-27 its average spread over the repo rate was just 5 bp (1 bp in the previous half-year). T-bill yields are also permitted external benchmarks for loans, though few banks use them.
- CDs and CPs. These carry a credit spread. In H1:2026-27 their average spreads over repo widened to 135 bp (CDs) and 155 bp (CPs) from 116 bp and 136 bp, reflecting banks' funding pressure.
- Government bonds. G-sec yields eased until August 2026 and then hardened in September on higher global yields, oil prices and expectations of tighter policy. That is the expectations part of the channel: markets priced the October hike before it happened.
- Corporate bonds. Yields followed G-secs, and the spread of 3-year AAA bonds over G-secs rose from 129 to 140 bp for NBFCs in H1:2026-27. Listed corporate bond issuance fell 17.9% in H1 (to August).
The bond channel matters more as large firms shift from bank loans to bonds and commercial paper, and as NBFCs, which borrow heavily in these markets, lend more.
The exchange-rate channel
Higher Indian interest rates relative to foreign rates tend to attract capital and support the rupee; a stronger rupee lowers the rupee price of imports such as crude oil, which reduces inflation. The channel can also work against the RBI. In 2026 the US Federal Reserve, the ECB and the Bank of Japan all raised rates, foreign portfolio investors were net sellers, and the rupee depreciated 6.2% against the dollar in H2:2025-26 and 1.4% in H1:2026-27. A weaker rupee raises imported inflation, part of the reason for the October hike. The RBI also manages the rupee directly through intervention and reserves (US$747.6 billion on 25 September 2026), so this channel is partly managed rather than left to the market. See exchange rate management and India's forex reserves.
Common exam traps
- EBLR is not the same as MCLR. MCLR is an internal benchmark set by each bank; EBLR is linked to an external rate, usually the repo rate.
- EBLR covers only new floating loans in specified categories (retail, and MSE from 1 October 2019, medium enterprises from 1 April 2020). It did not automatically convert old MCLR loans.
- Reset at least once in three months under EBLR; the spread's credit risk premium changes only with a substantial change in the borrower's credit assessment, and other components once in three years.
- Fresh vs outstanding. Fresh rates show new business and move faster in normal times; outstanding rates show the whole book. In 2025–26 outstanding WALR fell more than fresh WALR (91 vs 72 bp).
- Base rate date: 1 July 2010, not 1 April 2010 (the draft proposed April).
- MCLR date: guidelines 17 December 2015, effective 1 April 2016.
- Pass-through above 100% is possible: fresh deposit rates rose 259 bp against a 250 bp hike in 2022–25.
Key facts at a glance
| Transmission | Pass-through of policy rate changes to market, bank lending and deposit rates, then to demand and inflation |
| Lending regimes | PLR (October 1994) → BPLR (2003) → base rate (1 July 2010) → MCLR (1 April 2016) → EBLR (1 October 2019) |
| Committees | Deepak Mohanty Working Group on BPLR (report 20 October 2009); Janak Raj Internal Study Group on MCLR (report 4 October 2017) |
| EBLR benchmarks | Repo rate, 3-month or 6-month T-bill yield (FBIL), other FBIL benchmark rate |
| EBLR rules | Reset at least quarterly; one benchmark per loan category; credit risk premium changes only on credit event; other spread components once in three years |
| EBLR share | 68.2% of outstanding floating loans (end-June 2026); MCLR 29.6% |
| By bank group | EBLR share: foreign 94.7%, private 90.8%, public sector 53.6% |
| 2022–25 tightening (+250 bp) | Fresh WALR +182, outstanding WALR +115, fresh WADTDR +259, outstanding WADTDR +206 bp |
| 2025–26 easing (−125 bp) | Fresh WALR −72, outstanding WALR −91, fresh WADTDR −95, outstanding WADTDR −53 bp |
| October 2026 hike | Repo 5.50%; SBI EBLR 8.15%, RLLR 7.75% (from 15 October); 1-year MCLR 8.85% |
| Lag | 6–18 months in banking; credit response peaks about 13 months after a shock (MPR, October 2026) |
| Small savings | Unchanged for 11 quarters to Q3:2026-27; 1-year deposit 128 bp above formula |
| EMI reset rules | RBI circular of 18 August 2023 |
Exam corner: what to remember
- The order of regimes: PLR 1994 → BPLR 2003 → base rate 2010 → MCLR 2016 → EBLR 2019. Each was replaced because transmission was weak.
- MCLR's four components: marginal cost of funds, negative carry on CRR, operating costs, tenor premium.
- EBLR from 1 October 2019 (circular of 4 September 2019) for new floating retail and MSE loans; medium enterprises from 1 April 2020. Most banks chose the repo rate.
- The four rates to track: WALR fresh, WALR outstanding, WADTDR fresh, WADTDR outstanding.
- Latest numbers (MPR October 2026): repo −125 bp; fresh WALR −72; outstanding WALR −91; fresh WADTDR −95; outstanding WADTDR −53.
- Slow-transmission factors: MCLR legacy loans, fixed-rate term deposits, deposit competition, small savings rates, government borrowing, liquidity.
- Liquidity decides where the call rate sits in the corridor. In August–October 2026 the WACR averaged 14 bp below repo.
- After the 7 October 2026 hike, PSBs raised repo-linked rates from 8 October and SBI from 15 October; deposit rates were not raised at first.
For syllabus details, see our pages for RBI Grade B, SBI PO and IBPS PO.
Test yourself
Which lending-rate system came into effect on 1 April 2016?
Show answer
Answer: (c) The RBI's MCLR guidelines of 17 December 2015 applied to loans sanctioned or renewed from 1 April 2016.
Which of the following is NOT a permitted external benchmark under the RBI's circular of 4 September 2019?
Show answer
Answer: (c) MCLR is an internal benchmark; the external options are the repo rate, FBIL's 3-month or 6-month T-bill yield, or another FBIL benchmark rate.
Under the external benchmark system, the interest rate must be reset at least once every
Show answer
Answer: (b) The 2019 circular requires a reset at least once in three months.
The Working Group whose recommendations led to the base rate system was chaired by
Show answer
Answer: (c) The Working Group on Benchmark Prime Lending Rate, chaired by Deepak Mohanty, reported on 20 October 2009; the base rate began on 1 July 2010.
According to the RBI's October 2026 Monetary Policy Report, what share of banks' outstanding floating rate loans was linked to external benchmarks at end-June 2026?
Show answer
Answer: (c) 68.2%, up from 67.6% at end-March 2026; 29.6% was linked to the MCLR.
The repo rate was cut by 125 bp in 2025 and the WALR on outstanding loans fell by 91 bp. What is the pass-through?
Show answer
Answer: (b) 91 ÷ 125 = 0.728, or 72.8%.
A bank's EBLR is the repo rate plus a spread of 2.65 percentage points. A borrower pays EBLR plus 0.40%. If the repo rate rises from 5.25% to 5.50%, the borrower's new rate is
Show answer
Answer: (c) EBLR = 5.50 + 2.65 = 8.15%; adding 0.40% gives 8.55% (up from 8.30%).
After the repo hike of 7 October 2026, SBI's EBLR rose, with effect from 15 October 2026, to
Show answer
Answer: (b) It rose from 7.90% to 8.15% (plus premiums); 7.75% is SBI's new RLLR and 8.85% its new 1-year MCLR.
Why did the RBI say in October 2026 that it would "strive to align" the call rate with the repo rate?
Show answer
Answer: (b) Large surplus liquidity pushed the WACR towards the SDF floor, weakening the effect of policy.
Which factor does the RBI's October 2026 MPR say may be limiting the transmission of policy rates to bank deposit rates during easing?
Show answer
Answer: (b) Small savings rates were unchanged for 11 quarters; the 1-year post office deposit paid 128 bp more than its formula rate.
Further reading
- RBI, Monetary Policy Report, October 2026: Chapter II has the transmission table, benchmark shares, NBFC lending rates, small savings gaps and Box II.2 on the bank lending channel.
- RBI, Monetary Policy Report, April 2025: the full scorecard of the 2022–25 tightening and the long-run table of loan shares by benchmark from 2020.
- Report of the Internal Study Group to Review the Working of the MCLR System (Chairman: Janak Raj): the case against internal benchmarks and the design of the external benchmark; the clearest history of PLR, BPLR, base rate and MCLR.
- Report of the Working Group on Benchmark Prime Lending Rate (Chairman: Deepak Mohanty), 2009: why the BPLR failed and how the base rate was meant to fix it.
- RBI circular, External Benchmark Based Lending, 4 September 2019: the short official text of the rules that now govern most retail loans.
- RBI circular, Reset of Floating Interest Rate on EMI based Personal Loans, 18 August 2023: what lenders must tell borrowers when benchmark rates change.
- RBI press release on MCLR guidelines, 17 December 2015: the official summary of how MCLR is computed and reset.
Sources
- RBI, Monetary Policy Report, October 2026: Table II.7 (tightening and easing transmission, H1:2026-27 and monthly changes), EBLR and MCLR shares at end-March and end-June 2026, bank-group EBLR shares, MCLR quote, Table II.8 spreads, Table II.9 small savings rates, Box II.2 lags, liquidity (₹3.21 lakh crore net LAF absorption), T-bill, CD and CP spreads, corporate bond spreads and issuance, Centre's borrowing yield of 7.0%, rupee depreciation of 1.4% and 6.2%, reserves of US$747.6 billion (accessed 24 October 2026)
- RBI, Monetary Policy Report, April 2025: shares of outstanding floating rate loans by benchmark for March 2020, March 2022, March 2024 and December 2024 (accessed 24 October 2026)
- RBI, Governor's Statement, 7 October 2026: repo hike to 5.50%, WACR 14 bp below repo, "strive to align", 55 VRRR auctions, ₹1.0 lakh crore OMO sales, bulk deposit rates and liquidity surge (accessed 24 October 2026)
- RBI, Report of the Internal Study Group on MCLR and follow-up memo: PLR from October 1994, BPLR in 2003, 77% sub-BPLR lending in March 2007, base rate from July 2010, MCLR from April 2016, report released 4 October 2017, recommendations (accessed 24 October 2026)
- RBI, Report of the Working Group on BPLR, executive summary and press release, 20 October 2009: Deepak Mohanty as chairman, findings and the base rate recommendation (accessed 24 October 2026)
- RBI press release, 17 December 2015: MCLR guidelines effective 1 April 2016, tenor-linked benchmark, monthly review (accessed 24 October 2026)
- RBI circular, External Benchmark Based Lending, 4 September 2019: coverage from 1 October 2019, permitted benchmarks, uniform benchmark per category, spread rules, quarterly reset, transition of existing loans (accessed 24 October 2026)
- RBI circular on external benchmarks for medium enterprises, 26 February 2020: extension from 1 April 2020 (accessed 24 October 2026)
- RBI circular, Reset of Floating Interest Rate on EMI based Personal Loans, 18 August 2023: disclosure, choice of higher EMI or longer tenure, fixed-rate switch, prepayment (accessed 24 October 2026)
- ETV Bharat, 8 October 2026: PNB, Indian Bank, Bank of Baroda, Bank of India, IOB and Tamilnad Mercantile Bank raise repo-linked rates from 8 October; PNB MCLR unchanged (accessed 24 October 2026)
- BankingFinance.in, 16 October 2026: SBI EBLR 8.15%, RLLR 7.75%, MCLR changes and unchanged deposit rates from 15 October 2026 (accessed 24 October 2026)
- HDFC Sky News, 8 October 2026: Bank of Baroda's repo-based lending rate raised from 7.90% to 8.15% (accessed 24 October 2026)
- RBI, Governor's Statement, 5 June 2026: FCNR(B) swap facility and other capital-flow measures, FPI outflows of US$13.7 billion (accessed 24 October 2026)
- Outlook Business, December 2025: ₹1 lakh crore OMO purchases and US$5 billion buy/sell swap announced on 5 December 2025 (accessed 24 October 2026)
- RBI Annual Report 2025-26, Chronology of Major Policy Announcements: cuts in 2025 and CRR tranches to 29 November 2025 (accessed 24 October 2026)