State Bank of India (SBI), the country’s largest bank, linked its interest rates on savings bank deposits and short term loans to repo rate of Reserve Bank of India (RBI). The repo rate is interest rate at which RBI lends short term funds to banks. It is currently 6%.
SBI has linked savings bank deposits to repo rate with balances of more than Rs 1 lakh This will replace previous practice of linking deposits to Marginal Cost of Funds based Lending Rate (MCLR), an internal benchmark.
MCLR is minimum interest rate, below which bank is not permitted to lend. It depends on factors such as fixed deposit rates, source of funds and savings rate.
Advantage of linking to repo rate: It is expected to bring more transparency in fixing interest rates and help in faster transmission of rates.