Moneycontrol Pro Panorama | Asian Paints fades on urban demand, Mint Road holds the palette

Reserve Bank of India

Dear Reader,

Of late, there is a rising disparity between rural and urban demand. While rural demand has showed some signs of picking up, something is weighing down urban demand.

A key reason is the rising disparity between corporate profits and wage growth as rightly highlighted by the government’s chief economic advisor in the Economic Survey. Wages are not keeping pace with corporate profit growth.

According to the Economic Survey, while Indian corporates’ profits hit a 15-year peak in FY24, sluggish wage growth raises concerns about rising inequality and weaker demand. To put it in simple language, urban dwellers do not have enough money in their pockets at the moment to spend beyond basic necessities.

Even the iconic Asian Paints has lost its glitter for now, in part due to the urban demand slump.

That provides an easy clue for the new RBI Governor for his first ever rate call this Friday. The rather disappointing earnings from Asian Paints, India’s largest paints player, are yet another indicator of a widening dichotomy between rural and urban demand.

As this MC Pro research piece says, Asian Paints’ numbers indicates that the prospects for the company do not look bright at the moment and that the festive season did not provide the anticipated demand boost, indicating a slow recovery expected over the next two quarters. And that view has been echoed by several managements of FMCG firms.

As the Monetary Policy Committee (MPC) gears up to announce its decision this Friday, these signals add yet another compelling reason for the central bank to pivot towards a rate cut so that demand can be revived by making money cheaper.

For those, who missed the numbers, Asian Paints reported a staggering 23 percent drop in net profit to Rs 1,128 crore for the December quarter, with revenue falling 6 percent year-on-year to Rs 8,549 crore. This marks the fourth consecutive quarter of revenue decline for the company. The weak festive season, sluggish urban demand, and rising distribution costs paint a grim picture not just for the company but for the broader consumer sentiment. Even with the management’s cautiously optimistic outlook for future quarters, the immediate demand environment remains fragile.

Brokerages have got the right picture -- International brokerage Goldman Sachs maintained a 'sell' rating on Asian Paints, citing subdued near-term demand and intensifying competition. Nuvama Institutional Equities highlighted downtrading trends among consumers and a weak urban outlook, expecting a recovery only after two more quarters.

Don’t mistake this as an isolated corporate struggle; it’s a reflection of weakening consumer demand across sectors. Of course, the Budget has given a reason for the average Indians to spend more; but that isn’t enough. Only a fraction of Indians pay income taxes, after all. A tax rebate doesn’t mean much for the majority of 145 crore Indians.

Compounding the problem, rural demand — though relatively stronger — faces headwinds from the elevated levels of food prices and a slowdown in credit growth. These factors threaten to dampen economic activity in the coming quarters, undermining the fragile post-pandemic recovery. As the PMI for January shows, the growth momentum is slowing, bolstering the case for a rate cut on Friday.

In fact, the RBI’s hesitation to cut rates risks exacerbating the slowdown. Lower interest rates would reduce borrowing costs, stimulate consumer spending, and invigorate business investments. With inflation showing signs of moderation and growth indicators flashing red, the balance of risks has shifted decisively towards supporting growth. The RBI must act decisively this Friday. A rate cut is no longer just an option—It’s an economic imperative.

Dear Governor, go for it!

The RBI has sufficient reasons to press the gas pedal. As this chart of the day shows, inflation pressure has eased significantly in the recent months. Along with food inflation, the problematic core inflation too has softened, paving the way for a rate cut.

Dear Sanjay Malhotra, let’s go for that long elusive rate cut, at least now! Give some love for growth as well!

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