Small and medium enterprises' (SMEs) business confidence for the third quarter of this financial year has declined mainly because of high inflation and concerns over another hike in the interest rates by the RBI.

The Business Confidence Index (BCI) of SME stood at 54.7 after falling 2.5 points in the third quarter as compared to the July-September period, according to industry body, CII. The CII calculates the index on the scale of 0-100, where the higher is favorable.

"Inflation and high credit cost have certainly affected the Micro, Small and Medium Enterprises' (MSMEs) sentiments regarding credit availability," CII said.

The Reserve Bank had increased both the short-term lending (repo) rate and the short-term borrowing rate by 25 basis points on September 16. There are indications that the central bank will further increase the rate soon as inflation remains high.

The central bank has raised its key benchmark rates 12 times in 18 months causing the growth in the country to slowdown. Market analysts were earlier supportive of the stance to some extent but over the time, they have been frustrated with the rigidity and look at the raising of the rates with dismay because of it has been largely ineffective in tackling inflation.

"We live in an age where everything is interlinked and nothing happens in isolation and the tightening policies around the world will affect MSMEs in particular," CII Deputy Director General Gurpal Singh said.

He also pointed out that the sector has somewhat benefited by a two per cent interest subsidy to exporters, who are operating in sectors like handicrafts, handlooms and carpets.