For the better part of two decades, the Reserve Bank of India faced an exasperating problem: it would cut the repo rate, announce the decision at a press conference, and then watch as commercial banks simply refused to pass the reduction on to borrowers. Between 2015 and 2019, the RBI cut the repo rate by 135 basis points, but the weighted average lending rate on fresh rupee loans dropped by only 82 basis points. The gap was not accidental. It was structural — built into a lending rate framework that gave banks full control over how they calculated their benchmark, and therefore full discretion over how much of a rate cut actually reached the borrower's EMI statement.
The fix, when it finally arrived in October 2019, was radical in its simplicity: take the benchmark out of the bank's hands entirely and link it to the repo rate. That one change — the shift to the External Benchmark Lending Rate — rewired the transmission mechanism of Indian monetary policy.
Also in this series:
- Interest Rate Chain — From Repo to Savings Account
- Deposit & Savings Regulation — The Complete Timeline
- Regional Rural Banks — The Complete Regulatory Timeline
Why did banks ignore the RBI's rate cuts?
The reason was the design of internal benchmarks. Every lending rate regime before EBLR allowed banks to set the benchmark themselves, using their own cost calculations. Because Indian banks fund themselves primarily through fixed-rate term deposits — often locked in for one to five years at older, higher rates — their cost of funds moved sluggishly even when the repo rate fell. A bank that had raised three-year deposits at 8% in 2014 could not cut its lending benchmark just because the RBI lowered the repo rate in 2015. The deposit cost was contractually fixed, and the bank's internal benchmark reflected that stickiness.
This was the "transmission gap," and it triggered four successive attempts to close it.
What was the PLR, and why did it fail?
The Prime Lending Rate was the original regime — each bank set its own PLR with no standardised methodology. The RBI had no mechanism to verify how banks arrived at their rates, and there was no requirement for uniformity. Because PLR was entirely opaque, the RBI replaced it with the Benchmark PLR in 2003, the first attempt at a common reference rate. But the BPLR failed for a specific reason: banks were permitted to lend below BPLR, which they routinely did for large corporate borrowers. As the RBI later acknowledged in its Base Rate circular of April 2010 (since withdrawn):
"The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could lend below BPLR."
The sub-BPLR lending made the benchmark meaningless — it no longer served as an actual floor, and the RBI could not assess whether its policy rate changes were reaching borrowers.
How did the Base Rate try to fix the problem?
The Base Rate guidelines (DBOD.No.Dir.BC.88/13.03.00/2009-10, April 9, 2010) (since withdrawn) replaced BPLR with effect from July 1, 2010. The critical change: no lending below Base Rate was permitted. Banks had to include all common cost elements — cost of deposits, negative carry on CRR, unallocatable overhead costs, and an average return on net worth — but they could choose any methodology to calculate these components. That discretion was the reason Base Rate still failed to deliver adequate transmission. Different banks used different computation methods, and because the inputs were internal and backward-looking, the Base Rate moved slowly and inconsistently across the banking system.
The Deepak Mohanty Working Group, constituted by the RBI to review the BPLR system, had recommended this approach, but the discretion it preserved meant that Base Rate superseded BPLR without solving the core transmission problem.
What changed with MCLR in April 2016?
The Marginal Cost of Funds based Lending Rate, introduced through circular DBR.No.Dir.BC.67/13.03.00/2015-16 dated December 17, 2015, replaced the Base Rate system effective April 1, 2016. MCLR was more prescriptive than Base Rate because it mandated a specific methodology: marginal cost of funds (weighted 92%) plus return on net worth (weighted 8%), plus negative carry on CRR, plus operating costs, plus a tenor premium. Banks had to publish MCLR for five standard tenors — overnight, one-month, three-month, six-month, and one-year — and review it monthly.
The improvement over Base Rate was real. MCLR used marginal cost rather than average cost, meaning new deposit rates (which tracked policy rates more closely) carried greater weight. But the fundamental limitation remained: MCLR was still an internal benchmark. The bank controlled every input. And the reset periodicity — typically annual for most home loans — meant that even when MCLR fell, borrowers waited up to twelve months for the benefit. The RBI's own Internal Study Group, which examined the MCLR system and published its report in October 2017 (since withdrawn), concluded bluntly that "internal benchmarks such as the Base rate/MCLR have not delivered effective transmission of monetary policy."
Why was the external benchmark the breakthrough?
The External Benchmark circular (DBR.DIR.BC.No.14/13.03.00/2019-20, September 4, 2019) (since withdrawn) — consolidated into the Master Direction on Interest Rate on Advances — mandated that with effect from October 1, 2019, all new floating rate personal and retail loans (housing, auto) and floating rate loans to micro and small enterprises must be linked to one of four external benchmarks: the RBI policy repo rate, the 3-month Treasury Bill yield, the 6-month Treasury Bill yield, or any other benchmark published by FBIL. A subsequent circular dated February 26, 2020 (since withdrawn) extended the mandate to medium enterprises from April 1, 2020.
The design was deliberately simple. Banks can add a spread over the external benchmark, but credit risk premium can change only when the borrower's credit assessment undergoes a "substantial change." Other components of spread — including operating costs — can be altered only once in three years. And the interest rate must reset at least once every quarter.
This architecture removed the two causes of the transmission gap: the bank no longer controls the benchmark, and the reset frequency is short enough that rate changes flow through within ninety days.
Did EBLR actually improve transmission?
The RBI's own data says yes. The July 2021 RBI Bulletin (RBI Bulletin on EBLR Transition, July 2021 (PR_51899)) reported on the shift:
"The share of outstanding loans linked to external benchmark in total floating rate loans has increased from as low as 2.4 per cent during September 2019 to 28.5 per cent by the end of 2020-21."
By April 2022, the RBI Bulletin (RBI Bulletin on Monetary Policy Transmission, April 2022 (PR_53581)) confirmed: "Monetary policy transmission to lending and deposit rates has improved in the EBLR regime." The article noted that banks had reduced the weighted average lending rate on outstanding loans more than the repo rate cuts during the EBLR period — a result that no prior regime had achieved.
The March 2020 Bulletin (RBI Bulletin on Transmission Improvement, March 2020 (PR_49498)) had already flagged "early indications of an improvement in transmission in respect of sectors where new floating rate loans have been linked to an external benchmark."
What happens when rates go up?
EBLR works symmetrically — and the 2022-23 tightening cycle proved it. When the RBI raised the repo rate by 250 basis points between May 2022 and February 2023, EBLR-linked home loans repriced within a quarter. Borrowers who had benefited from rapid rate cuts in 2020 now felt rate hikes with equal speed. For many, the monthly EMI jumped or the loan tenor extended by years.
This symmetry is the point. The entire EBLR framework exists because monetary policy only works if the repo rate actually reaches borrowers — in both directions. A system that transmits only cuts but not hikes is asymmetric and distortionary. EBLR eliminated that asymmetry.
What about borrowers still on MCLR or Base Rate?
The transition clause in the September 2019 circular states that existing loans linked to MCLR, Base Rate, or BPLR "shall continue till repayment or renewal." Banks must offer borrowers the option to switch to the external benchmark — and for floating rate term loans where no prepayment penalty applies, the switchover must be provided without charges beyond reasonable administrative costs. The rate after switchover must equal the rate charged on a new loan of the same category.
In practice, millions of borrowers remain on older regimes because they have not actively requested the switch. These legacy MCLR and Base Rate loans carried forward higher effective rates through the easing cycle of 2019-2020, and borrowers who did not switch paid significantly more than those on EBLR. The RBI has repeatedly flagged this compliance gap, noting that banks have not always proactively offered the switchover option. For borrowers on these older benchmarks, the deposit and savings rate framework matters more — because the bank's internal cost of funds, not the repo rate, still drives their interest rate.
The amendment chain: four regimes in thirty years
The evolution from PLR to EBLR represents one of the longest regulatory iteration chains in Indian banking. Each regime replaced, amended, or consolidated its predecessor:
- PLR (pre-2003) — no standardisation, fully bank-determined
- BPLR (2003) — first common benchmark, superseded by Base Rate in 2010
- Base Rate (July 2010, Base Rate Guidelines RBI/2009-10/390 (since withdrawn)) — replaced BPLR, prohibited sub-benchmark lending
- MCLR (April 2016, MCLR Guidelines RBI/2015-16/273) — replaced Base Rate with marginal cost methodology
- EBLR (October 2019, External Benchmark Circular RBI/2019-20/53 (since withdrawn)) — replaced internal benchmarks with external ones for retail and MSME lending, now consolidated into Master Direction RBI_10295
The November 2025 consolidation exercise — in which the RBI withdrew thousands of standalone circulars and replaced them with entity-specific Master Directions — brought the interest rate framework under the updated Master Direction on Interest Rate on Advances (Master Direction - Reserve Bank of India (Interest). The earlier circulars on Base Rate, MCLR, and EBLR were withdrawn, but their substance was carried forward into the consolidated directions.
The lesson of thirty years of benchmark reform is straightforward: monetary policy transmission requires that the central bank's policy rate reaches the borrower without being filtered through the commercial bank's own cost calculations. Every internal benchmark — PLR, BPLR, Base Rate, MCLR — gave banks a legitimate reason to delay or dilute rate changes. The external benchmark removed that filter, and the data confirms that transmission improved as a result.
Last updated: April 2026