Editorial. Q2 results signal downside risk to growth 

Rising interest rates are beginning to dampen domestic demand

The impact of the ongoing monetary tightening by the Reserve Bank of India (RBI) to bring CPI inflation down to 4 per cent on a sustainable basis was bound to have a negative impact on corporates. A large part of domestic consumption has been fuelled by low interest rates and easy availability of credit. As interest rates in the economy begin moving up, domestic demand, particularly from interest sensitive segments, is beginning to suffer. This is evident in the second quarter earnings of India Inc.

An analysis of the results of 787 companies by this newspaper shows that revenue growth (excluding BFSI sector) was flat at 0.3 per cent. This is the second consecutive quarter when these companies have announced almost no growth in revenue when compared to the same quarter last year. India Inc. has, however, been able to report strong growth in profitability due to declining commodity prices. Profit after tax grew 55 per cent for the sample companies as gross margins expanded sharply for sectors such as refineries, paint, steel and pharma. Higher overheads, however, depressed EBITDA margins of many manufacturers. 

Consumers have been hit not just by increase in interest rates, but by high inflation and slowing wage growth as well. This has resulted in falling volumes for FMCG and paint manufacturers. While automobile manufacturers have reported strong volume growth, demand for smaller cars dropped, with more takers for premium and luxury cars. The purchases of mid-sized cars seem to have been fuelled by bank credit. The trend is similar in real estate with demand from economically weaker sections waning and larger and premium apartments witnessing higher offtake. As the transmission of the 250 basis points hike in repo rate begins to take lending rates higher, credit-led boom in consumption could be further hit in the coming quarters. 

Banks and finance companies, which have recorded sharp jump in profitability in the last few quarters could witness moderation in earnings as credit growth, especially in retail loans, slows, and net interest margins compress. Information Technology companies are also facing a challenging global environment resulting in contraction in digital, discretionary and other high margin businesses. This is resulting in the IT sector, which is among the largest employment providers for white-collar workers, cutting down its annual intake of employees as well as lowering pay hikes. Other sectors witnessing slowdown in revenue are also likely to adopt similar cost optimisation measures, or postpone capital expenditure, impacting overall growth in the economy. 

The RBI needs to heed these signals. While the central bank is right in giving high priority to price stability and wanting to keep interest rates elevated for longer to control inflation, it should be careful not to destabilise the nebulous growth. With large sections, especially smaller businesses and low-income households, yet to fully recover completely from the pandemic, ignoring the rising risks to growth can prove harmful going ahead. 

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