Comment on the following: The interest rate given by a bank for deposits and the repo rate are the decisive factors in the calculation of Marginal Cost of Funds based Lending Rate (MCLR).

The Reserve Bank of India has brought a new methodology of setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (MCLR). It has modified the existing base rate system from April 2016 onwards. As per the new guidelines issued by the RBI, banks have to determine Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark lending rates. Based upon this MCLR, interest rate for different types of customers should be fixed in accordance with their risk profile. The base rate will be now determined on the basis of the MCLR calculation. The MCLR should be revised monthly by considering some new factors including the repo rate and other borrowing rates. Specifically the repo rate and other borrowing rates were not explicitly considered under the base rate system. As per the new guidelines, banks have to set five benchmark rates for different tenure or time periods ranging from overnight (one day) rates to one year. The new methodology uses the marginal cost or latest cost conditions reflected in the interest rate given by the banks for obtaining funds (from deposits and while borrowing from RBI) while setting their lending rate. This means that the interest rate given by a bank for deposits and the repo rate (for obtaining funds from the RBI) are the decisive factors in the calculation of MCLR.