RBI's MPC meet: Third straight hike in interest rates likely; here's what to expect

The Reserve Bank of India (RBI) is expected to raise the key lending rate for the third consecutive time in its August bi-monthly policy meet -- outcome of which is due on Friday -- given the consumer price-based or retail inflation staying above the central bank's upper tolerance limit of 6 per cent for the sixth straight month in July. The decision to hike rate, in tandem with other central banks across the globe, could be seen as an effort to tame inflation that is stoking fears of the economy going into recession.

Prior to this, the RBI had hiked the repo rate by 90 basis points in its previous two meetings. In August, the increase could be up to 50 basis points, an expert said.

"The global geopolitical situation and the elevated commodity prices indicate that inflation will likely remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23. The RBI may announce a hike of 30-50 basis points in its monetary policy meeting this week to pacify the rising inflation," said Adhil Shetty, CEO, Bankbazaar.com.

The rate hike directly impacts the equated monthly instalments (EMIs) of a home or personal loan.

"The third hike would mean costly home and personal loans. Parents servicing education loans for their children will also feel the pinch of higher interest rates. Also, your car and two-wheeler loans are going to become expensive in the future," Shetty added.

Best way forward?

"The best way forward for borrowers would be to either go for a higher EMI or make regular prepayments. There are several options to choose from, from as little as one extra EMI per year to as much as 5 per cent of outstanding principal every year to reduce the burden of higher interest rates. Choose the alternative that works best for you taking into account your financial situation and liabilities," Shetty further said.

What else to expect?

Previously, the RBI's working group had proposed stringent standards for digital lenders, including separate legislation to prevent illegal digital lending activities.

"Apart from the rate revisions, there is also an expectation that RBI may make critical policy announcement around as a pre-cursor to its detailed regulations on digital lending," he concluded.

RBI Governor Shaktikanta Das said that inflation may not fall within the top end of its mandated target band until December this year.

The central bank factors in the retail inflation print in its bi-monthly monetary policy. The government has tasked the RBI to ensure inflation remains at 4 per cent with a margin of 2 per cent on either side.