Let me explain these interest rate setting regimes briefly, before I turn to an assessment of the performance of the (legacy) Base Rate and (prevalent) MCLR systems. In India, as in a number of other countries, a large proportion of loans is at floating rates, i.e., the interest rate charged to the borrower keeps changing depending on the reset periodicity.
The floating rate is linked to some “benchmark rate” (which ideally varies over time in consonance with the changing macroeconomic and financial conditions and, in particular, the central bank’s policy rate). Banks also charge a spread over the benchmark to factor in term premia and credit risk, among other factors. The actual lending rate is the benchmark plus the spread.