How will RBI repo rate hike affect the MSMEs

Reserve Bank of India raised the Repo Rate on three occasions in the past 3 months latest being on 5th August 2022. The Repo Rate now stands at 5.40 % which is higher than the pre-pandemic level of 5.15% and significantly higher than the repo rate of 4% witnessed during pandemic times. The prime motivation for such an action by the Monetary Policy Committee(MPC)  is to tame the high levels of Inflation which crossed the RBI's tolerance band on several occasions in the past few months. MPC said that it would remain focused on withdrawal of accommodation to ensure inflation remains within target going forward.

Rise in Repo Rate will make borrowing more expensive for all classes of Borrowers including the MSME's. This is because banks use repo rate as an external benchmark to set their internal lending rates. Thus monthly EMI will become higher and new loans will become expensive. It will also slow down the investments made by small businesses and dent their expansion plans. This will have an adverse impact at a time when MSME's are struggling to recover from Pandemic losses.

However some experts have pointed that measures by the RBI to tame inflation will has some positives for MSMEs as well, such a measure over the medium term will bring input costs for businesses down and make products more competitive, also lower inflation will boost business confidence and revive demand and investment cycle over the medium to long term.

Other experts feel that timely availability of liquidity and other schemes supporting the MSME sector such as Priority sector lending and credit guarantee schemes will cushion impact of higher rate of interest.

Bottom Line remains that MSME have borne the biggest brunt of the pandemic and face various issues such as liquidity crunch, lack of demand, rising input costs. Rate hikes will adversely impact MSME however it is a necessary instrument that is needed to put a brake on accelerating inflation. Policy makers must focus of ensuring provision of adequate liquidity to the sector and creating an enabling ecosystem so that businesses can thrive and contribute to making India a 5 Trillion dollar economy.

References

1. Business Standard                             2. RBI Dashboard

3. Financial Times                                  4. Economic Times

5. PIB Bulletin