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Evolution of Interest Rate Benchmarks in India: Simplifier



  Jun 22, 2024

Evolution of Interest Rate Benchmarks in India: Simplifier



PLR,Base Rate,MCLR and EBLR

Q1: What is the Prime Lending Rate (PLR)?

A1: The PLR was the original benchmark interest rate that financial institutions charged their most creditworthy customers. However, it lacked transparency and allowed for discriminatory pricing.

Q2: Why was the Base Rate introduced?

A2: Introduced in 2010, the base rate system aimed to create a minimum interest rate for most borrowers, ensuring greater fairness. However, it still allowed for some discretion and didn't fully transmit policy rate changes.

Q3: What is the Marginal Cost of Funds based Lending Rate (MCLR)?

A3: Launched in 2016, MCLR linked lending rates more closely to banks' funding costs. It was considered more responsive to changes in the repo rate but still had some limitations in transmitting rate changes quickly.

Q4: What is the External Benchmark Lending Rate (EBLR)?

A4: Introduced in 2019, EBLR directly links lending rates to external benchmarks like the repo rate or treasury bill yields.This system aims to ensure faster and more transparent transmission of monetary policy.

Q5: What are the key objectives of these changes in interest rate benchmarks?

A5: The key objectives are:

Transparency: Make interest rate determination more transparent and predictable for borrowers.
Fairness: Ensure that all borrowers are treated equally and not subjected to discriminatory pricing.
Transmission: Improve the transmission of monetary policy changes to lending rates.

Q6: What has been the overall impact of these changes?

A6: These changes have significantly improved the interest rate setting mechanism in India, making it more transparent,fair, and responsive to monetary policy changes. However, ongoing debate and fine-tuning are still needed for optimal transmission and effectiveness.




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