Homeowners often find their EMIs changing even when the RBI repo rate stays steady. This happens because older loans linked to MCLR follow a bank's internal funding costs rather than direct central bank policy. Understanding your loan benchmark and reset cycle is essential for managing monthly payments.
As the Reserve Bank of India prepares for its upcoming monetary policy announcement, many borrowers are watching for cues on interest rate movements. While the repo rate—the interest rate at which the central bank lends to commercial banks—often grabs the headlines, it does not tell the full story for every mortgage holder. The actual change in your monthly loan payment, or Equated Monthly Installment (EMI), depends heavily on the specific benchmark your bank uses to calculate your interest rate.
External Benchmarks Versus Internal MCLR
Since October 2019, the RBI has required banks to link new floating-rate retail loans to an external benchmark, with the repo rate being the most commonly adopted standard. For these loans, any change in the repo rate typically results in a faster adjustment to the borrower's interest rate. This is designed to ensure that central bank policy decisions reach consumers quickly.
However, a large portion of older home loans are still tied to the Marginal Cost of Funds Based Lending Rate, or MCLR. Unlike repo-linked loans, MCLR is an internal benchmark determined by individual banks. It is calculated based on a bank's specific cost of raising deposits, operating expenses, and internal financial metrics. Because of this, an MCLR-linked loan can experience rate adjustments that do not perfectly mirror the shifts in the RBI's repo rate.
The Impact of Reset Cycles
Even when the repo rate remains unchanged for several policy cycles, borrowers may still see their EMIs fluctuate if they are on an MCLR-linked plan. This is because banks review and reset their MCLR periodically, often at intervals defined in the original loan agreement, such as every six months or every year. When these reset periods coincide with changes in the bank's internal funding costs, the interest rate on the loan is adjusted accordingly.
Borrowers with older loans may find themselves in a position where their interest rate remains higher than current market rates for repo-linked products. This difference often leads homeowners to consider switching their loans. When evaluating such a shift, it is important to factor in the potential conversion fees, administrative costs, and any new terms the bank might introduce. Comparing the effective interest rate of an existing MCLR loan against current repo-linked offerings is a standard step for those looking to manage long-term debt costs. Tracking the specific reset date of your loan agreement is also crucial, as this determines exactly when any interest rate change will reflect in your bank account.