MCLR vs Repo Rate: How They Affect Your LAMF Interest Rate?
When investors take a Loan Against Mutual Funds (LAMF), the interest rate may be linked to different lending benchmarks. Two common benchmarks are the MCLR and the repo rate. MCLR is a bank’s internal lending benchmark, while the repo rate is set by the RBI and influences borrowing costs across the financial system.
This difference matters because interest rates linked to the repo rate may respond more quickly to RBI rate changes, while MCLR-linked loans may adjust more gradually, depending on the bank’s reset cycle.
In this article, we explain the difference between MCLR and repo rate, how each benchmark affects borrowing costs, and why borrowers should understand the rate structure before taking a loan against mutual funds.
What Is the Repo Rate?
The repo rate is the interest rate at which the RBI lends short-term funds to banks against eligible government securities. It is a key monetary policy rate used to influence borrowing costs, liquidity and inflation in the economy.
The Monetary Policy Committee reviews the repo rate at its scheduled meetings. As of October 2026, the repo rate stands at 5.50%, after the RBI raised it by 25 basis points on 7 October 2026. Before this hike, the rate had remained at 5.25% following cumulative cuts of 125 basis points during 2025.
Changes in the repo rate can affect borrowing costs across the financial system. For LAMF products linked to an external benchmark such as the repo rate, changes in the benchmark may lead to corresponding changes in the applicable lending rate, subject to the lender’s spread and reset terms.
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What Is the MCLR?
The MCLR is an internal benchmark that each bank computes from its own cost of funds. Introduced by the RBI in April 2016 to replace the older Base Rate system, it is the minimum rate below which a bank cannot lend for a given tenor.
For a LAMF from a bank priced on MCLR, your rate is expressed as: MCLR (for a specific tenor, usually 1 year) + Spread. The spread is the bank’s markup above MCLR reflecting the product’s risk profile.
| MCLR Component | What It Represents |
| Marginal cost of funds | Weighted cost of deposits and borrowings recently raised by the bank (92% weight in the formula) |
| Negative carry on CRR | Cost of holding Cash Reserve Ratio balances, on which the bank earns no interest |
| Operating costs | Overheads related to raising and managing funds |
| Tenor premium | Additional charge for longer loan durations, reflecting duration risk |
Because MCLR is calculated from the bank’s own funding costs, it does not move in lockstep with the repo rate. A bank with a large proportion of high-cost fixed deposits will see its MCLR drop slowly even after a sharp repo rate cut. This is why MCLR-linked LAMF rates lag behind RBI policy changes.
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How are LAMF Interest Rates Set?
Unlike home loans, for which the RBI has mandated external benchmark linkage for all new retail floating-rate loans since October 2019, LAMF is offered by both banks and NBFCs, with different pricing structures.
How Do RBI Rate Cuts Impact LAMF Borrowers?
RBI rate cuts can reduce borrowing costs, but the impact on Loan Against Mutual Funds (LAMF) depends on how the lender prices the loan. A repo rate cut does not automatically reduce every borrower’s LAMF interest rate.
- Repo-linked LAMF: Repo-linked loans may reflect RBI rate cuts faster because they are tied to an external benchmark. The rate can change when the lender resets the loan rate, subject to the spread and loan terms.
- MCLR-linked LAMF: MCLR-linked loans may respond more slowly. MCLR depends on the bank’s internal cost of funds, so the benefit of a repo rate cut may be partial or delayed.
- Fixed-rate LAMF: Fixed-rate LAMF may not change with repo rate or MCLR movements.
In short, RBI rate cuts may lower LAMF borrowing costs for some borrowers, but the actual impact depends on the lender, benchmark, reset cycle, spread, and loan agreement.
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Things to Understand Before Taking a LAMF
When comparing Loan Against Mutual Funds (LAMF) options, borrowers often focus only on the starting interest rate. However, the benchmark type, spread, and reset cycle can also affect the actual borrowing cost over time. Understanding how interest rates work can help borrowers evaluate how their loans may respond to future RBI rate changes.
| Question | Why It Matters |
|---|---|
| Is the rate fixed or floating? | Fixed rates keep the borrowing cost stable for the agreed period. Floating rates can rise or fall depending on market interest rates. |
| If floating, is it linked to MCLR or the repo rate? | Repo-linked rates usually react faster to RBI rate changes. MCLR-linked rates may change more gradually depending on the bank’s internal benchmark revisions. |
| What is the reset frequency? | The reset cycle decides how often the interest rate changes. Shorter reset periods may pass on rate cuts or hikes faster. |
| What is the spread above the benchmark? | Lenders add a spread over the benchmark rate. Even if two loans use the same benchmark, the final borrowing cost can differ because of the spread. |
| Can the lender revise the spread? | Some loan structures keep the spread stable over the loan term, while others may allow changes under certain conditions specified in the loan agreement. |
To Wrap It Up…
For LAMF borrowers, the difference between MCLR-linked and repo-linked lending mainly affects how changes in benchmark interest rates may flow through to borrowing costs.
In a repo-linked bank LAMF, changes in the RBI repo rate may be reflected more quickly, subject to the lender’s reset frequency and applicable spread. In an MCLR-linked facility, changes can take longer because MCLR also depends on the bank’s funding costs and internal reset cycle.
For fixed-rate LAMF products, the borrowing rate generally remains unchanged for the agreed period, regardless of short-term movements in the repo rate or MCLR.
Borrowers should check whether their LAMF is linked to the repo rate, MCLR or a fixed rate, along with the reset frequency, spread and other applicable charges, before comparing borrowing costs.
Disclaimer: This article is for educational and informational purposes only and should not be considered financial, investment or lending advice. Loan eligibility, approval, interest rates, credit limits, charges and other terms are subject to the lender’s policies, applicable regulations and the value of the securities pledged. Please review the applicable loan agreement, terms and conditions, and associated risks carefully before borrowing. If you are considering a Loan Against Mutual Funds, you can learn more about our LAS and LAMF offerings in detail at the help centre.
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Frequently Asked Questions on MCLR vs Repo Rate
It depends on your lender and product structure. If your LAMF is from a bank on a repo-linked (EBLR) structure, a repo rate change reaches your interest rate within 3 months of the next reset. If it is on an MCLR structure, the change arrives with a lag at the next reset date, which may be 6 to 12 months away.
There are two likely reasons. If your LAMF is MCLR-linked, rate cuts only reach you at your next reset date, which may still be in the future. Even then, the bank’s MCLR may not have fallen by the full 125 basis points. If your LAMF is a fixed-rate product from an NBFC, the rate is set for the tenure and does not change with RBI policy.
LAMF interest rates vary across lenders and depend on factors such as the loan amount, type and value of mutual funds pledged, applicable benchmark rate and the lender’s pricing policy. Borrowers should compare the applicable interest rate, reset terms and other charges before taking the loan.
In a falling rate environment like 2025, a repo-linked LAMF would have reduced your interest cost. In a rising rate environment, a fixed rate protects you from higher costs. Fixed-rate products offer certainty and are easier to plan around. Floating-rate bank products offer potential savings if the RBI continues cutting, but they also carry upside rate risk. The right choice depends on your view of the rate cycle and your tolerance for payment variability.
The repo rate is the rate at which the Reserve Bank of India lends short-term funds to commercial banks. As of October 2026, the RBI’s policy repo rate is 5.50%. The Monetary Policy Committee raised it by 25 basis points on 7th October 2026.
As of April 2026, the 1-year MCLR for major banks typically ranges between 8.50% and 9.25%, varying by institution. Each bank publishes its MCLR schedule on its website. Verify the current rate at your specific bank before applying for a LAMF.
This depends on the bank’s policy. Some banks allow existing MCLR borrowers to switch to an EBLR structure for a conversion fee. Contact your bank directly to check if this is available for your LAMF and what the switching cost would be.
