Second rate hike by RBI in two months. Here's why

NEW DELHI: The Reserve Bank of India (RBI) hiked the repo rate (at which it lends to banks) by 0.25 percent to 6.5 percent and the reverse repo rate (at which it borrows from banks) to 6.25 percent. It is the second hike in just two months and second under the Modi government.

Good monsoon and a sudden increase in the government-guaranteed price for crops will raise farmers' income, then rural demand and then inflation. However, if the companies pass on the recent GST rate cuts, some of the impact of inflation will get adjusted. Crude oil price has moderated but there's no certainty on where it's headed. High fuel prices can give excite the inflation to go higher. Expected GDP growth rate of 7.4 percent for the year is a sign of a strong economy.

Among Asian currencies, Indian rupee has dropped the most against the US dollar. High interest rates can cease the fall by attracting foreign capital.

Loans will get costlier because banks are reluctant to pass on rate cuts but are quick to cash in on hikes. Depositors may gain as banks are likely to raise deposit rates marginally after SBI's move this week. RBI looks forward to make it easier for banks to address customer complaints.