The Consumption is Taking a Hit: A Recessionary Sign?

The Recent quarterly earnings analysis by CNBC Awaz, of major players like Bajaj Auto, Nestlé, and Havells highlight growing concerns of a potential slowdown in India's economy. Photo: The Times of India.

While these earnings reflect a drop in consumer demand, the Reserve Bank of India (RBI) remains focused on controlling inflation within its target range of 4% ± 2%, currently aiming to keep it boxed under 5% or to be precise at 4%.

The RBI's Balancing Act: Inflation and Growth: The RBI Governor Shaktikanta Das recently reaffirmed that the central bank's primary focus remains on curbing inflation, which stood at 5.02% as of September 2024. Das has emphasized the importance of keeping inflation under control but also acknowledged the necessity of maintaining economic growth. Risks, including geopolitical tensions and climate-related disruptions, could still challenge inflation management in the coming months.

However, given the relative success in bringing inflation down, I feel that, now is the time to introduce a modest monetary stimulus to support the broader economy. A 25 basis point (bps) cut in the repo rate could provide much-needed relief to both consumers and businesses, encouraging consumption and investment.

The Global Context: U.S. Federal Reserve’s Recent Move: The U.S. Federal Reserve has already initiated a rate-cutting cycle, reducing its benchmark rate by 50 bps in September 2024. This was the first significant cut since 2008, intended to combat rising unemployment and provide support to the economy as inflation inches closer to the Fed’s 2% target. The Fed’s decision reflects a broader global trend where central banks are prioritizing growth, even if it means tolerating slightly higher inflation.

A sustained higher interest rate by a central bank can significantly damage a country’s economy by increasing the cost of borrowing for consumers and businesses. 

Moreover, elevated interest rates can lead to higher debt servicing costs for governments, crowding out public spending on essential services and infrastructure.

Caveat: An overly hawkish monetary policy—where a central bank maintains elevated interest rates over an extended period—can significantly damage the fundamental pillars of an economy. 

By keeping borrowing costs high, such a policy suppresses consumer spending and business investments, leading to slower economic growth. 

High interest rates also raise the cost of servicing debt for both businesses and governments, crowding out investment in critical areas like infrastructure and social services. Over time, this can weaken the economy’s productive capacity, increase unemployment, and potentially push the country toward recession. 

Moreover, industries that rely heavily on borrowing or debt - financing, such as real estate/construction or capital-intensive sectors, may face heightened risk of defaults (job losses, lower economic activities, etc), exacerbating economic instability.

As seen in past instances, such as the Eurozone debt crisis, an ultra - tight monetary policy can push economies into recession; if inflation control comes at the expense of growth.

A Call for Action in India: Considering global trends and the current state of the Indian economy, I believe a 25 bps cut in the Repo rate would be both timely and necessary. 

This move would not only ease the pressure on businesses and consumers but also help maintain the momentum of India’s projected GDP growth of 6.7% for FY25. 

Conclusion: I feel it is pertinent to mention here that while inflation must be kept in check or shouldn't be allowed to spiral out of control, a modest Repo - rate cut at this juncture can strike the crucial balance between inflation control and sustaining economic growth; ensuring that the economy does not stagnate under the weight of high borrowing costs.

Therefore, while hawkish policies of central banks aim to curb inflation, their long-term impact can undermine economic fundamentals; if growth and employment are sacrificed.