 to 4.9% recently, resulting high repo rat){kind=link}
Small firms and shops who are already under pressure due to the Covid-19 effect and skyrocketing inflation will be negatively impacted by a hike in the repo rate, which has a direct impact on lending rates. Retailers with few options are in a difficult situation since, according to experts, reducing borrowing will have an adverse effect on revival and growth and incur additional costs due to bank borrowing.Due to the ongoing inflation, the Reserve Bank of India (RBI) increased the lending rate by 50 basis points (bps) to 4.9% recently.
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The action was taken just a month after the central bank unexpectedly increased the primary policy rate, the repo rate, by 40 basis points to 4.40 percent in an effort to lower the high inflation and combat the effects of geopolitical concerns. In a recent interview with one of the media platforms RBI Governor, Shaktikanta Das hinted that the central bank will keep raising policy interest rates to reduce inflation, but he would not clarify whether they would be hiked to levels seen before the pandemic.
In India, the annual WPI rate increased to 15.08% in April 2022 from 14.55% the previous month, exceeding the 14.48% market expectation.
Small and medium-sized enterprises have been affected by the current circumstances much more than the government’s current retail or wholesale inflation figures would suggest. The same is suggested by a study conducted by the Mumbai-based SP Jain Institute of Management and Research (SPJIMR).
As per the survey, Indian businesses are seeing a considerable increase in their operational costs and are responding by raising prices to prevent losses—a move that may not be long-term.
According to their sectoral affiliation and size, the SMEs have been impacted differently by the rise in operating costs.
Additionally, the RBI has increased the cap for MSME funding on the TReDS platform from Rs 1 crore to Rs 3 crore.
The National Automated Clearing House (NACH) mandate limit for settlements relating to the Trade Receivables Discounting System (TReDS) was increased by the Reserve Bank of India (RBI) from Rs 1 crore to Rs 3 crore in its monetary policy review in February.
The RBI developed TReDS in 2014 to help Micro, Small, and Medium-Sized Enterprises (MSMEs) who were experiencing a working cash crisis because of concerns with delayed payments.
According to RBI Governor Shaktikanta Das, it is suggested to raise the NACH mandate limit for TReDS-related settlements from Rs 1 crore to Rs 3 crore while taking into account stakeholder requests and boosting the liquidity needs of MSMEs.
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Given that the maximum value of each invoice was Rs 1 crore, it was difficult for MSMEs to produce many invoices. The increased ceiling, though, would now have a beneficial effect on MSME funding because it would make it easier to submit smaller invoices for larger sums. Hopefully, this action will persuade banks to tighten their invoicing restrictions.
Additionally, analysts claim that since the value of goods and transactions among MSMEs has expanded over the past few years, the cap on MSME invoices of Rs 1 crore cannot be maintained. Therefore, raising the NACH ceiling to Rs 3 crore is a sensible decision. The sector asked RBI to raise the NACH ceiling to Rs 5 crore in light of the MSME ecosystem’s expansion as a result of the updated MSME definition.
Higher interest rates will make borrowing more expensive for MSMEs. This would cause plans for investment and expansion to stall, which would have an effect on profitability. Due to a lack of cash, small firms are already having trouble, and the repo rate increase would make matters worse. The cost of doing business for MSMEs will undoubtedly rise as a result of rising loan interest rates. Additionally, they can have a difficult time obtaining financing from banks and other financial organizations.