India has seen a significant drop in inflation from higher levels, partly due to increased supply and policy interventions like rate cuts....

 Past rate hikes and low interest rate expectations have delayed spending and growth in INDIA... Last years gold rally was a hedge against uncertainty after bout of inflation due to supply side shocks hit by covid and later by wars... Higher inflation and expectations have now turned in lower inflation and expectations through rate cuts and increase in supply...

In India, the recent monetary policy tightening (rate hikes) and subsequent expectations of lower interest rates have indeed influenced spending and growth, but the impact is complex and not solely due to these factors. While rate hikes can dampen demand by increasing borrowing costs, the effect on investment and supply is also influenced by factors like inflation expectations, supply chain issues, and overall economic uncertainty.

Rate Hikes and Spending:

Delayed Spending:

Higher interest rates increase the cost of borrowing for both consumers and businesses. This can lead to delayed spending on durable goods, housing, and capital investments.

Impact on Discretionary Spending:

Companies like TCS have already started delaying salary hikes due to weakened client spending, indicating a broader trend of delayed discretionary spending, according to Angel One.

Transmission Lag:

The effect of interest rate changes isn't immediate. There's a lag before these changes are fully reflected in loan rates, especially for older loans.

Impact on MSMEs:

Small and medium-sized businesses (MSMEs) are particularly vulnerable to interest rate changes and can be significantly impacted by tightening monetary policy.

Inflation Expectations and Growth:

Gold as a Hedge:

During periods of high inflation, gold often rallies as investors seek safe-haven assets. The gold rally last year was partly a hedge against uncertainty caused by supply-side shocks and high inflation.

Shift in Inflation Expectations:

India has seen a significant drop in inflation from higher levels, partly due to increased supply and policy interventions like rate cuts.

Impact on Investment:

Lower inflation expectations can encourage investment, as businesses become more confident in future profitability. However, the transmission of lower rates to investment is not always smooth.

Supply-Side Constraints:

While inflation has eased, supply-side issues, such as those related to global supply chains, can still impact growth and investment decisions.

Neo-Fisherian Effect:

There's a debate about whether lower policy rates can lead to lower inflation. Some argue that a commitment to lower rates can eventually reduce inflation expectations and spur growth.

Overall Impact on Growth:

Slowing Growth:

While India's economy continues to grow, there are signs of slowing growth, with the GDP growth rate dropping to a five-quarter low.

Complex Relationship:

The relationship between interest rates, inflation, spending, and growth is complex and influenced by various factors. While rate hikes can dampen demand, other factors like supply chain disruptions, global economic conditions, and government policies also play a crucial role.

Need for a Balanced Approach:

Monetary policy needs to be carefully calibrated to balance the need to control inflation with the need to support sustainable economic growth.

In conclusion, while rate hikes and lower interest rate expectations have played a role in influencing spending and growth in India, the impact is multifaceted. Factors like inflation expectations, supply chain issues, and the overall global economic environment also significantly influence investment and supply decisions.