RBI Rate Hike Should Maintain Price Stability Without Impacting Cost of Credit for MSMEs
· Free Press Journal
“The ₹10,000-crore SME Growth Fund announced by the Union Cabinet should help alleviate financing pressures arising from the rate hike. A simplified and streamlined implementation framework will be critical to ensuring that the Fund effectively supports manufacturing growth, investment and employment generation,” said Dr. Vijay Kalantri, Chairman, MVIRDC World Trade Center Mumbai and President, All India Association of Industries (AIAI).
“The Reserve Bank of India’s decision to raise the policy repo rate by 25 basis points to 5.50% reflects the emerging inflationary pressures arising from the West Asian crisis, particularly elevated commodity and energy prices. While maintaining price stability is essential for sustainable economic growth, monetary tightening must be carefully calibrated so that it does not raise the cost of productive credit for industry, particularly MSMEs and exporters. At this juncture, India needs to preserve the momentum in private investment, manufacturing and employment creation,” said Dr. Vijay Kalantri, Chairman, MVIRDC World Trade Center Mumbai and President, All India Association of Industries (AIAI), in his first reaction to the decision of the Reserve Bank of India’s Monetary Policy Committee (MPC) to raise the benchmark lending rate to 5.5%.
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The MPC unanimously decided to increase the policy repo rate from 5.25% to 5.50%, marking the first increase in nearly four years. The Committee also shifted its monetary policy stance from “neutral” to “calibrated tightening”, reflecting increased vigilance towards inflation.
Dr. Kalantri welcomed the RBI’s upward revision of India’s real GDP growth projection for FY 2026–27 to 7.1% from 6.7% in lieu of the higher-than-expected growth of 7.8% in Q1, noting that the revision demonstrates the underlying resilience of the Indian economy despite a challenging global environment. “The upward revision in the growth forecast is encouraging and reinforces confidence in India’s medium-term economic prospects. However, given the dynamic global environment, we hope that the RBI’s policy measures will help contain emerging inflationary pressures, creating room for monetary policy to gradually shift towards supporting growth,” he observed.
The RBI’s MPC has raised its CPI inflation projection for FY27 to 5.2%, reflecting rising risks from food, fuel and other commodity prices. Dr. Kalantri observed that the RBI’s concern over inflation is understandable but emphasised that monetary policy alone cannot address inflation arising primarily from supply-side and external factors. Greater attention should therefore be given to strengthening supply chains, improving logistics efficiency and addressing structural cost pressures faced by businesses.
Dr. Kalantri also welcomed the Union Cabinet’s approval of the ₹10,000 crore SME Growth Fund, describing it as an important step towards addressing the long-term growth-capital needs of Indian enterprises. “The SME Growth Fund is a timely initiative that can help create a new generation of globally competitive Indian enterprises. However, equity support must be complemented by affordable and accessible credit. At a time when the policy rate has increased, we must ensure that viable MSMEs are not constrained by rising borrowing costs. A combination of patient equity capital and competitively priced credit will be critical for strengthening manufacturing, exports and employment generation,” he said.
“MSMEs are particularly sensitive to changes in borrowing costs. A higher repo rate should not result in a disproportionate increase in lending rates for productive enterprises. MSMEs already face substantially higher effective borrowing costs than the policy rate, along with processing fees and other financial charges. We need a competitive credit environment that enables them to invest in technology, expand capacity and generate employment,” Dr. Kalantri concluded.
RBI Governor Sanjay Malhotra in his statement highlighted the West Asian crisis, slowing down global growth, tightening of monetary policy by major central banks, trade uncertainty and unfair valuation of AI stock as factors to increase the benchmark lending rate in India owing to FDI outflows, increase in G-Sec yields and rising inflation. However in spite of the above challenges, RBI is optimistic about continued northward trajectory of GDP growth which provided space for rate hike.