RBI Could Again Cut Rates. But Still No Cookies For MSMEs

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), which will meet this week, is expected to further reduce interest rates, amid an easing of headline inflation. Currently, the repo rate stands at 6 per cent.

In April, India’s retail inflation further cooled to touch 3.16 per cent — the lowest since July 2019. A normal monsoon, as expected this year, will add a cushion to economic activities, especially in the rural sector.

A low-interest-rate environment will be key to enhancing consumption while supporting economic growth. This will also give a boost to sentiment, at a time when the global economic growth dynamic looks weak and uncertain, especially with frequent tariff changes by the Donald Trump administration.  

“Our focus is economic growth, and we need to be ready to take necessary policy decisions as and when required. A rate cut will naturally help,” a senior government official told The Secretariat. 

Demand for bank credit has been slowing. It fell to a single-digit growth of 9.8 per cent as of mid-May, from 19.5 per cent during the corresponding period in the previous year, something that will worry policymakers.  

The central bank reduced the repo rate — the rate at which banks borrow from the RBI — twice this year, in February and April, each time by 25 basis points.

While the State Bank of India is expecting the RBI’s rate-setting panel to announce a 50-basis point cut this week, most analysts expect another 25-basis point reduction. The cumulative rate cut over the cycle could be 100 basis points, the SBI said in its report.

MSMEs Continue To Struggle

Despite the RBI's interest rate cut, the country's micro, small, and medium enterprises (MSME) sector is battling for affordable credit. 

“Banks are not very open to giving credit to the MSMEs. The RBI’s rate cut has not been passed on to these micro and small enterprises, which have been facing serious challenges due to the uncertain tariff regime and other supply chain issues,” Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small and Medium Enterprises (FISME) told The Secretariat.

India has more than 6 crore MSMEs. Many others shut down in the post-Covid phase. 

A senior banker at a public sector bank said that though lenders have been asked to provide all necessary support to the MSMEs, they have been reluctant to open their loan kitty to these units. They continue to favour large companies.

Public sector banks are yet to set up their in-house credit assessment mechanisms for MSMEs. Typically, large companies enjoy higher investment-grade ratings. For MSMEs to compete with large companies for equal investment grade is challenging.

Lower investment ratings would mean banks not only seeking collateral, but also higher interest rates.