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Informist, Wednesday, Jun. 25, 2025

 

NEW DELHI – Small manufacturing companies are more sensitive than their larger counterparts to monetary policy while making investment decisions, according to a paper by Reserve Bank of India staff published Wednesday. With their resource constraints, smaller manufacturers have to rely on internal funds when monetary policy is tight, while larger firms have better access to external finance.

 

"These findings suggest that strengthening corporate balance sheets and targeted credit support--particularly for small firms--can enhance the effectiveness of accommodative monetary policy in stimulating investment," the article in the RBI's monthly bulletin for June said. The paper, authored by members of the central bank's Department of Economic and Policy Research and the Financial Markets Regulation Department, does not represent the views of the RBI.

 

The RBI's Monetary Policy Committee has cut the policy repo rate by 100 basis points to 5.50% in three meetings starting February. The central bank has also infused INR 9.50 trillion of relatively longer-term liquidity since January to ensure the banking system is flush with funds, in a push to increase policy transmission, bring down borrowing costs, and push up credit growth.

 

The study confirmed that the balance sheets of manufacturing companies show a marked sensitivity to monetary policy. Transmission to a company's borrowing capacity and investment decisions takes place through the balance sheet channel by having an impact on its net worth, cash flow, and liquidity, according to the paper.

 

The authors analysed company-level data between 2003 and 2023 for the study, with the model examining the relationships among investment, company-specific financial variables, real GDP growth, and monetary policy. "While the balance sheet channel operates for both highly leveraged and less leveraged firms, there is no clear evidence of differences in their sensitivity to cashflow," the authors said.  End

 

Reported by Aaryan Khanna

Edited by Rajeev Pai

 

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