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Mumbai: Public sector lender Bank of Baroda (BoB) has announced a reduction in its marginal cost of funds-based lending rate (MCLR) for certain tenures, effective September 12, 2025. The move is set to provide some relief to borrowers in need of short-term funds, though long-term borrowers, particularly those with home loans, may not see immediate benefits.
Details of the Rate Cut
In its official announcement, Bank of Baroda confirmed the following revisions:
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Overnight MCLR: Reduced by 10 basis points (bps) from 7.95% to 7.85%.
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Three-month MCLR: Reduced by 15 bps from 8.35% to 8.20%.
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One-month MCLR: Unchanged at 7.95%.
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Six-month MCLR: Unchanged at 8.65%.
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One-year MCLR: Maintained at 8.80%, a key benchmark for home and auto loans.
This indicates that while borrowers of short-tenure loans will gain from lower EMIs, those tied to the one-year MCLR — the most widely used benchmark for retail loans — will not experience any change in their repayment burden for now.
What is MCLR and Why It Matters?
The Marginal Cost of Funds-Based Lending Rate (MCLR) is the minimum rate below which banks cannot lend, except in specific cases permitted by the Reserve Bank of India (RBI). It was introduced in April 2016 as a replacement for the earlier base rate system to ensure faster and more transparent transmission of monetary policy decisions to borrowers.
MCLR varies across different tenures such as overnight, 1-month, 3-month, 6-month, and 1-year. Floating-rate loans, especially home and auto loans, are directly tied to MCLR, meaning any upward or downward change affects loan EMIs.
How MCLR is Calculated
MCLR is not a flat figure but a formula-driven rate based on several factors, including:
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Marginal cost of funds – Primarily driven by deposit rates and other borrowings.
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Negative carry on CRR – The cost banks incur for maintaining the mandatory cash reserve ratio with RBI without earning interest.
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Operating costs – Administrative and service costs of running the bank.
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Tenor premium – Additional cost charged for longer-tenure loans due to higher risks.
As a result, MCLR moves in tandem with RBI’s policy actions, changes in deposit rates, and overall liquidity in the banking system.
Impact on Borrowers
The latest revision will have differential impacts depending on the type of loan:
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Short-term Loans: Borrowers availing overdraft facilities, working capital, and short-tenure corporate loans linked to overnight or three-month MCLR will benefit immediately.
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Retail Loans: Since home loans and auto loans are largely tied to the one-year MCLR, which remains unchanged at 8.80%, these borrowers will not experience relief in their EMIs.
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Personal Loans: If linked to three-month MCLR, the reduction could slightly lower monthly repayments.
Experts note that the decision will help businesses with short-term financing needs more than individuals with long-term commitments.
Why the Rate Cut Now?
The reduction comes at a time when the banking sector is navigating a competitive lending environment and steady growth in deposits. With the cost of funds easing marginally, banks have gained room to reduce lending rates on select maturities.
It also reflects the broader trend of aligning borrowing costs with market liquidity conditions. While the Reserve Bank of India has kept its repo rate steady in recent months, the marginal drop in MCLR tenures signals banks’ efforts to balance growth and profitability while ensuring affordability for customers.
Expert Opinions
Financial analysts view the move as a positive signal for liquidity and credit flow in the economy.
“By cutting overnight and three-month MCLR, Bank of Baroda has created a more favorable environment for short-term borrowers. However, the decision to keep the one-year MCLR unchanged highlights the bank’s cautious stance on long-term lending,” said a senior market expert.
Another analyst added that while repo-linked lending rates have become increasingly popular since RBI’s 2019 directive, MCLR-linked loans still account for a large share of outstanding credit, making such revisions significant for borrowers.
What Should Borrowers Do?
Borrowers are advised to:
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Check loan tenure linkages: Identify whether their loan is tied to MCLR or repo-linked rates.
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Evaluate refinancing options: Switching from MCLR-linked loans to repo-linked loans could provide more savings in the long term.
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Track reset dates: Even if MCLR is revised downward, the new rate will apply only from the loan’s next reset date, not immediately.
Conclusion
Bank of Baroda’s latest cut in overnight and three-month MCLR rates is a welcome step for borrowers in need of short-term funding. However, with the one-year MCLR — the benchmark for most retail loans — left unchanged, the impact on home and auto loan customers will be minimal.
The move reflects banks’ balancing act between passing on benefits of lower funding costs and maintaining stability in long-term lending. Borrowers must remain vigilant, explore alternative benchmarks like repo-linked loans, and plan their finances to make the most of such changes.
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