Lower Q2 growth estimates, a dip in corporate earnings and falling urban consumption back the call for rate cut

Mounting anxieties over the prospect of a slowdown in growth coinciding with a disappointing quarter for corporate earnings and a decline in urban consumption, frame the backdrop of the present clamour for rate cut from top government quarters. Research agencies estimate that growth has most likely slowed during the July-September quarter (Q2) of the current fiscal, with official data set to be released on November 29.

On Wednesday, ICRA projected the year-on-year (y-o-y) expansion of the GDP to decline to 6.5 per cent in July-September quarter (Q2 of FY25) from 6.7 per cent in April-June quarter (Q1 of FY25). Earlier, the SBI research report also pegged its estimate at 6.5 per cent, while RBI in its October bulletin projected a 6.8 per cent growth rate.

The slowdown in growth rate is also reflected in the second quarter performance of corporates. A report by Motilal Oswal Financial Services showed that Nifty 50 companies reported only a 4 per cent growth in Q2, with commodities dragging down the earnings. A different side of the same picture was reflected in a Finance Ministry report, which highlighted a dip in urban consumption.

This is the background for a strong pitch for an interest rate cut by Finance Minister Nirmala Sitharaman and before her, Commerce Minister Piyush Goyal.

Economists recommended different policy prescriptions.

DK Srivastava, Chief Policy Advisor at EY India, said the main reason for the growth slowdown is the contraction in GoI’s capital expenditure at (-)15.4 per cent during April-September 2024 and advocated both fiscal policy action in the form of accelerated government expenditure and monetary policy action which may be delayed beyond December 2024.

Rumki Majumdar, Economist at Deloitte India felt that higher interest rates might tamper consumption temporarily, but persistent inflation builds expectations of rising prices, eroding confidence and curbing spending in the long run.

Devendra Kumar Pant, Chief Economist with India Ratings & Research said despite the decline in risk-free (10-yr Gsec) rate and easing of banking sector liquidity, banks’ lending rates are high. He said while the impact of interest on consumption is weak, it is strong for real wage growth and consumption growth. “The desirable combination is – 100bp decline in inflation with the same nominal wage,” he said.