Impact of High Repo Rate
A rise in the repo rates, which directly affects lending rates, will negatively impact small businesses and shops already under pressure from the Covid-19 effect and skyrocketing prices. Retailers who have few options are facing a tough situation. Experts believe that a rise in the repo rate, which has a direct impact on lending rates, will negatively affect their ability to borrow.
This action came just one month after the central banks unexpectedly raised the primary policy rate, or the repo rate by 40 basis points, to 4.40 percent. It was done in an attempt to reduce high inflation and counter the effects of geopolitical worries. Shaktikanta Das, the RBI Governor, suggested that the central bank would continue raising policy interest rates in order to lower inflation. However, he did not specify whether these would rise to levels before the pandemic.
India's annual WPI rate grew to 15.08% in April 2022, from 14.55% in the previous month. This was higher than the market expectation of 14.48%.
The current economic conditions have had a significant impact on small and medium-sized businesses, more than current government retail and wholesale inflation figures would indicate. A study by the SP Jain Institute of Management and Research, Mumbai (SPJIMR) suggests that this is true.
According to the survey, Indian companies are experiencing a significant increase in operational costs. They are responding by raising prices to avoid losses. This may not be a long-term strategy.
The rise in operating expenses has had a different impact on SMEs depending on their sector and size.
The RBI also increased the limit for MSME funding via the TReDS platform, from Rs 1 crore up to Rs 3 crore.
In its February monetary policy review, the Reserve Bank of India (RBI), increased the NACH mandate limit for settlements related to the Trade Receivables Discounting System(TReDS).
TReDS was developed by the RBI in 2014 to assist Micro, Small, and Medium-Sized Enterprises, (MSMEs), who were facing a cash crunch due to delayed payments.
Shaktikanta Das (RBI Governor) suggests that the NACH mandate limit for TReDS settlements be increased from Rs 1 crore to R 3 crore. This will take into consideration stakeholder requests and boost liquidity needs for MSMEs.
It was difficult for MSMEs produce multiple invoices due to the fact that each invoice had a maximum value of Rs 1 crore. However, the increased ceiling would have a positive effect on MSME funding as it would be easier to submit smaller invoices for greater amounts. This action should encourage banks to tighten their invoice restrictions.
Analysts claim that the limit on MSME invoices at Rs 1 crore is too low because of the increase in the value of goods, transactions, and services among MSMEs over the years. The NACH ceiling should be raised to Rs 3 Crore. In light of the expansion of MSME ecosystems as a result the revised MSME definition, the sector requested RBI to increase the NACH ceiling from Rs 3 crore to Rs 5 crore.
MSMEs will be more likely to borrow if there are higher interest rates. This could cause investment plans and expansion to stop, which would impact profitability. Small firms already face financial difficulties due to cash shortages. The repo rate hike would only make things worse. Rising loan interest rates will cause an increase in the cost of doing business by MSMEs. They may also have difficulty obtaining financing from banks or other financial institutions.
