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Banks jack up deposit rates, MCLR after RBI raises repo

  • December 15, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Banks jack up deposit rates, MCLR after RBI raises repo

Subject :Economy

Banks hiking retail deposit rates by up to 65 basis points following the Reserve Bank’s move to increase the repo rate last week

Marginal Cost of Lending Rate

  • It is a benchmark lending rate for floating-rate loans which came into effect in 2016.
  • This is the minimum interest rate at which commercial banks can lend.
  • This rate is based on four components—the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.
  • MCLR is linked to the actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike MCLR and lending rates are set to go up.
  • The transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory.

External Benchmark

  • So, RBI mandated all banks to link their floating rate loans to an external benchmark instead of the marginal cost-based lending rate (MCLR).
  • This was done to make sure that the RBI’s action on key policy rates at transmitted in a timely and transparent manner to the ender user, i.e., the borrower.
  • Banks can choose from one of the four external benchmarks — repo rate, three-month treasury bill yield, six-month treasury bill yield or any other benchmark interest rate published by Financial Benchmarks India Private Ltd.

Banks jack up deposit rates economy

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