How the RBI rate hike will impact you

The Reserve Bank of India on Thursday hiked the repo rate and reverse rate to 6 per cent and 5 per cent, respectively, in a bid to control inflation.

Inflation is still hovering in double digits with food inflation shooting up to 11.47 per cent and fuel price index at 12.71 per cent for the week-ending August 28 from last week's 10.86 per cent.

Earlier it was expected that since food inflation was in single digits, the focus of RBI might shift to non-food inflation. However, with food inflation again showing a rising trend, tackling inflation seems to be an Achilles' heel for the RBI.

The spread between repo and reverse repo is also narrowed down by 25 basis points. The cash reserve ratio (CRR) has not been increased from its current level of 6 per cent contrary to apex bank's earlier indication to contain inflation.

So, what does this means for for consumers and borrowers?

Click NEXT to find out the impact of RBI's policy on household expenses, housing loan, car loan and personal loan for the next few months . . .

Impact on household expenses and borrowers

Banks might increase the base rate considering the fact that credit demand will pick up in October and bankers will assess the demand supply situation before taking a call.

The repo rate was earlier hiked from 5.5 per cent to 5.75 per cent and the reverse repo rate from 4 to 4.50 per cent in July. And now, the repo rate and reverse repo rate have been hiked by 25 and50 basis points, respectively.

All these factors will lead to an increase in the base rate of the banks. This in turn will lead to an increase in your housing loan, car loan and personal loan rates.

The increase in the repo rate and reverse rate will be good news for depositors as banks will hike the deposit rates before they take a call on the lending rates linked to base rate.

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Impact on education loans

The impact of increase in key policy rates will have similar impact for education loan as well. But since the government may plan to cap the education loans at 2 per cent over and above the base rate, this move could substantially reduce the funding cost for students.

The RBI has narrowed down the spread between repo and reverse repo again by 25 basis points. The fact that it will review the monetary policy every one and a half months, the short term volatility in overnight rates will be reduced.

This will further bring stability in financial market. As there is liquidity crunch in the market, the operating rate of banks will continue to be the repo rate.

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Inflation to fall

The food price inflation rose from 10.86 per cent to 11.47 per cent while the fuel price index stayed flat at 12.71 per cent for the week ended August 21.

It is expected that there will be a large dip in food prices after October as kharif harvest would bring down the prices.

Hence, with RBI increasing the key policy rate along with the fact that kharif harvest would bring down the prices, it seems that overall inflation including the fuel price index will fall in the months to come.

It is quite clear from the key policy rate hikes that the apex bank is hawkish about containing inflation.  Housing loan, car loans, personal loans and education loan will get costlier in the months to come, beginning October.

However, the deposit rates will be increased in line with the increase in key policy rates. All these measures will ensure that your food bills and fuel expenditure turn cheaper in the coming months.