State Bank of India (SBI), India’s largest commercial bank, recently raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years, signalling that the soft rates regime that has prevailed since 2019 may be over.
- MCLR, which RBI instituted with effect from April 1, 2016, is the lowest interest rate that a bank or lender can offer.
- It is applicable to fresh corporate loans and floating rate loans taken before October 2019.
- RBI then switched to the external benchmark linked lending rate (EBLR) system where lending rate is linked to benchmark rates like repo or Treasury Bill rates.
Why the hike in MCLR?
- The hike in MCLR is in line with RBI Shifting its focus from pushing growth to taming inflation. Going forward, RBI may even raise repo rates-the rate at which the RBI lends to commercial banks.
- Indicating upward pressure on interest rates, the yield on 10-year benchmark government bonds has reached 7.15 per cent, rising 24 bps in less than two weeks.
- On the other hand, the cost of funds is set to increase, prompting banks to hike lending rates.
- RBI has kept the repo rate unchanged in the last 11 policy reviews in a bid to boost growth. Interest rates on loans and deposits are expected to rise across the board when the repo rate is finally hiked in June or August
What does increased MCLR mean for you?
- An increase in MCLR means that all housing loans linked to MCLR will see a rise in the interest rates. You will either see a rise in your EMI or an increase in your loan tenure.
- Even those with existing home loans will see a series of interest rates hikes over the coming months, with expected increase in repo rate.
- As a result of the increase in MCLR, borrowers who have taken home, vehicle, and personal loans will find their equated monthly instalments (EMIs) rising in the coming months.
- With the RBI set to withdraw the accommodative policy (the willingness to expand money supply to boost economic growth), lending rates are expected to rise further in the coming months.
- According to the SBI research report, deposit rates are likely to “increase meaningfully” over the next one-two months.
What Should one do?
- Given that Fixed Deposit rates are at their lowest in recent times, those with home loans can use part of your savings to prepay your home loan.
- Others who don’t have much savings but can afford to pay a higher EMI should increase your monthly EMI.
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