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 rate at which the RBI lends short-term funds to commercial banks against government securities. It is the RBI’s primary tool for managing inflation and liquidity. When the repo rate falls, banks’ cost of funds drops, and lenders who price their LAMF on a repo-linked structure can reduce their rates.
The repo rate is set publicly by the Monetary Policy Committee (MPC) every two months. As of April 2026, it stands at 5.25%, after four cuts totalling 125 basis points in 2025. Because it is publicly available and easy to track, repo-linked LAMF rates are the most transparent for borrowers.
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.
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. Your interest rate is typically structured in one of three ways:
| Lender Type | Pricing Structure | What It Means for You |
|---|---|---|
| Banks | MCLR + spread, or Repo Rate + spread (EBLR structure) | Your rate moves when the benchmark moves, at the next reset date |
| NBFCs (e.g. Bajaj Finance via smallcase) | Fixed rate set internally – not directly tied to MCLR or repo rate | Your rate stays the same regardless of RBI policy moves |
| Some NBFCs and digital lenders | Floating rate benchmarked to an external rate or the cost of funds | Rate can change, but less predictably than bank EBLR products |
On smallcase, LAMF is offered through Bajaj Finance at an interest rate starting at 9.99% p.a. on the outstanding amount drawn. This rate does not automatically change with the repo rate or MCLR.
MCLR vs Repo Rate: Key Differences for LAMF Borrowers
| Parameter | Repo Rate-Linked LAMF | MCLR-Linked LAMF | Fixed Rate LAMF (NBFC) |
|---|---|---|---|
| Benchmark | RBI repo rate – public, tracked every 2 months | Bank’s internal MCLR – varies by bank and tenor | No benchmark – rate set by lender |
| Transparency | High repo rate is publicly announced | Moderate – MCLR calculation is internal and varies by bank | Simple – the rate is stated upfront |
| How fast a repo cut reaches you | Within 3 months (mandated reset frequency for EBLR loans) | At the next reset date – typically 6 to 12 months away | Does not reach you – rate is fixed |
| How fast a repo hike reaches you | Within 3 months – faster in both directions | At the next reset date – some protection during a rate hike cycle | Does not reach you – full protection from hikes |
| Spread rules | Spread is fixed once set – the bank cannot raise it without a reason | Both MCLR and spread can be adjusted by the bank | The rate is contractually fixed for the tenure |
| Current context (April 2026) | Borrowers have largely received the 2025 rate cut benefit | Borrowers may still be waiting for the full benefit, depending on the reset timing | Rate unchanged – neither benefit nor additional cost from 2025 cuts |
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. For example, smallcase LAMF starts at 9.99% p.a. through Bajaj Finance and is not directly linked to repo or MCLR.
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.
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 Warap It Up..
For LAMF borrowers, the difference between MCLR and repo rate comes down to one key question: how quickly can an RBI rate change affect your borrowing cost?
In a repo-linked bank LAMF, rate cuts or hikes may reflect faster, usually within the lender’s reset cycle. In an MCLR-linked bank LAMF, the impact can take longer because MCLR depends on the bank’s internal funding costs and reset schedule. In a fixed-rate NBFC LAMF, such as a smallcase LAMF, repo rate or MCLR movements do not directly change the rate during the loan period.
You can explore loan against mutual funds on smallcase to check your eligible credit limit, view applicable terms, and understand the cost of borrowing against your mutual fund holdings before applying.
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. If your LAMF is a fixed-rate product from an NBFC like Bajaj Finance via smallcase, the repo rate does not affect your rate at all.
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.
On smallcase, the interest rate for LAMF starts at 9.99% p.a. on the outstanding amount drawn. Interest is charged only on the amount drawn, not on the full sanctioned credit limit. You can use the LAMF interest rate calculator to estimate the total repayment amount, monthly interest payable, and overall borrowing cost.
Disclaimer: The interest rate mentioned above is based on publicly available information as of 13th May 2026. Interest rates, charges, eligibility criteria, and lending terms may change over time. Borrowers should always verify the latest details directly on the smallcase platform before applying.
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.
As of April 2026, the repo rate is 5.25%. The RBI cut rates four times in 2025, reducing it by 125 basis points from 6.50%. The MPC held rates steady at its April 2026 meeting with a neutral stance. The next scheduled MPC meeting is in June 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.
