SIDBI Sees RBI Extending Rate Pause, Expects Credit Flow For MSMEs To Rise

New Delhi, Feb 17 (KNN) The Reserve Bank of India (RBI)'s decision to hold on repo rate signals the central bank’s preference to allow earlier rate reductions to fully transmit across the financial system before considering further policy action, as per a Small Industries Development Bank of India (SIDBI) article titled ‘Smarter Borrowing for MSMEs: Fixed or Floating Rates in 2026?’.

The SIDBI article examines the evolving monetary environment and its implications for micro, small and medium enterprises (MSMEs).
 
Repo Rate Kept Unchanged After Easing Cycle
 
Referring to the February 2026 meeting of the Monetary Policy Committee (MPC) of the RBI, the SIDBI article noted that the pause on policy repo rate follows a cumulative 125 basis points rate cut cycle undertaken between February and December 2025.

In its bi-monthly meeting earlier this month, the MPC kept the repo rate unchanged at 5.25 percent. 
 
With economic growth strong and inflation within the tolerance band, the prevailing macroeconomic conditions suggest a likely extended pause in interest rates through 2026.
 
Growth Momentum Remains Strong
 
The RBI has upgraded India’s GDP growth forecast for FY26 to 7.4 percent, reaffirming its position as the fastest-growing major economy. Projections for FY27, 6.9 percent in the first quarter and 7.0 percent in the second quarter, indicate sustained momentum supported by consumption, investment, a revival in manufacturing and continued strength in the services sector.
 
On inflation, the central bank has retained its FY26 CPI projection at 2.1 percent, near the lower end of the 2–6 percent target band. 
 
However, inflation is expected to rise gradually to around 4 percent in the first half of FY27. SIDBI observed that the combination of robust growth and gradually rising inflation leaves limited headroom for further rate cuts.
 
The article highlighted that liquidity management has become increasingly challenging due to volatile capital flows, pressure on the rupee, elevated government borrowing requirements and strong credit demand. Non-food credit growth is currently in the range of 13–14 percent.
 
To stabilise liquidity, the RBI conducted open market operations (OMO) purchases totalling Rs 4.5 lakh crore between December 2025 and early February 2026. Total bond acquisitions during FY26 reached Rs 5.7 lakh crore. 
 
The central bank also carried out USD/INR buy-sell swap auctions aggregating USD 25 billion and multiple Variable Rate Repo (VRR) operations to inject short-term liquidity into the banking system.
 
Despite these interventions, government and corporate bond yields have remained elevated due to high bond supply and global uncertainties. While short-term money market rates are expected to ease gradually, longer-term yields may remain firm owing to structural pressures.
 
Transmission Shows Progress, But Challenges Remain
 
Data cited in the article indicates that the weighted average lending rate on fresh loans declined by 110 basis points between February and December 2025, while lending rates on outstanding loans fell by 70 basis points.
 
However, reductions in deposit rates have been relatively modest, reflecting competitive pressures in deposit mobilisation and higher returns available in alternative investment avenues. The MPC’s decision to pause was described as pragmatic in light of incomplete transmission and persistent liquidity challenges.
 
Continued Policy Support for MSMEs
 
The article also underscored ongoing measures to strengthen MSME credit flow. These include doubling the collateral-free lending limit from Rs 10 lakh to Rs 20 lakh and expanding credit guarantee coverage. 
 
Additional steps cited include strengthening the Lead Bank Scheme, expanding the Business Correspondent network, integrating MSMEs into a unified digital credit framework and improving cooperative bank governance under Mission SAKSHAM.
 
Stability in Rates, Focus on Liquidity
 
SIDBI concluded that the February policy outcome signals continuity in stance, with the RBI prioritising stability amid strong growth, moderate inflation and external uncertainties. 
 
While the interest rate cycle appears to have paused, liquidity management is expected to remain the central focus of monetary policy through 2026, making borrowing strategy decisions particularly relevant for MSMEs.
 
(KNN Bureau)