In the Monetary Policy Committee (MPC) announcement today (August 5, Wednesday), Reserve Bank of India (RBI) governor Sanjay Malhotra announced that the Central Bank proposes to rationalise the regulatory framework on interest rates for all Regulated Entities (REs) on a principle-based basis. The RBI governor said that the proposed rationalisation aims to harmonise the guidelines across REs while maintaining proportionality. Another aim of the interest rate framework of REs is to address certain operational aspects of the current framework on Marginal Cost of Funds-based Lending Rate (MCLR) and External Benchmark Lending Rate (EBLR), says Malhotra.Also Read: RBI MPC: Home loan borrowers can breathe a sigh of relief, but how long their good days will last?Before you continue readingHow financially free are you?Most people overestimate their financial freedom. Discover your Financial Freedom score through a quick surveyExplaining the proposal further, the RBI governor says that the proposal also aims to standardise certain divergent market practices concerning interest charging, including day count convention and benchmark reset dates. These measures seek to ensure uniformity, enhance transparency in loan pricing, strengthen monetary transmission and bolster consumer protection, the RBI governor explained. Malhotra also says that the RBI will soon release draft directions for these proposals, seeking public comments. As far as the RBI’s announcement about REs interest rate framework is concerned, it has given a broader hint. However, further details about these changes are awaited and may be known once the RBI issues a draft for the more.Also Read: RBI policy: Will high-interest rate cycle return for FD investors as RBI holds repo rate amid rising inflation?What are EBLR and MCLR benchmarks? External Benchmarks Lending Rate (EBLR) and Marginal Cost of Funds-Based Lending Rate (MCLR) are used to determine interest rates for loans in India. Many home loans in India are based on the Repo Linked Lending Rate (RLLR) benchmark, which is also one of the EBLRs. The repo rate impacts such home loan rates since it is the rate at which banks borrow money from the central bank. When the RBI reduces the repo rate, banks can get loans at a cheaper rate. Since banks save money with these lower-rate loans, they transfer these benefits to their borrowers by cutting interest rates on loans. The opposite also happens when the RBI raises the repo rate. Banks follow in the RBI’s footsteps and increase their home loan rates, resulting in a higher EMIs for borrowers with repo rate-linked loans. On the other hand, borrowers with their home loans linked to Marginal Cost of Funds-based Lending Rate (MCLR), experience a slower transmission of the repo rate cut into their loan EMIs. As far as borrowers with fixed interest rate loans are concerned, their loans are not linked to the repo rate and there is no change in their interest rates.