RBI's liquidity-boosting policy is expected to support SMEs and the financial sector
Amid signs of slowing growth in the Indian economy, the Reserve Bank has announced a significant policy shift to increase liquidity in the financial system. The move is expected to provide relief, particularly to small and medium-sized enterprises, which have recently faced difficulties accessing funds.
Highlights
- The Reserve Bank of India's new liquidity policy aims to increase fund flows in the economy and respond to the recent growth slowdown.
- The policy is expected to ease credit flows and improve financing availability for banks, NBFCs and, in particular, the SME sector.
- According to analysts, the policy could boost investment, but markets remain cautious due to concerns about inflationary pressure over the long term.
This article was translated from the original. Read the original version by our correspondent here.
Policy shift and its objectives
According to ICRA, a Moody's affiliate, this move by the Reserve Bank of India is focused on strengthening liquidity in the financial system and increasing the availability of funds in the economy. The central bank took this decision after recent economic indicators pointed to slower growth.The change comes at a time when several sectors, especially SMEs, are facing pressure in raising capital and accessing credit. RBI officials have said economic conditions will be closely monitored to ensure the effective implementation of the new measures.
Sectoral and inflation impact
The policy is likely to support banks, non-banking financial companies and the broader corporate borrowing market, as additional liquidity could improve credit flows. It is particularly significant for the SME segment, which often faces obstacles to investment and expansion plans due to a lack of financing.However, analysts' views are mixed. Some see it as a measure that could encourage investment, while others say it could affect inflation over the long term, keeping markets focused on both the policy's benefits and risks.
Our previous report discussed the RBI's monetary policy review and its hawkish stance, noting that the repo rate was raised by 25 basis points to 5.5%, alongside higher forecasts for GDP growth and CPI inflation for FY27. The report also noted that, amid inflation risks, the central bank took several measures, including OMO sales, to absorb liquidity and stabilise the rupee, signalling that policy would remain tight in the near term.
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