The World Economy is currently under high inflation pressure. This is the reason why the Fed and even the Indian government have made alterations to the interest rates. The simple calculator behind this is as follows :- With an increase in Interest rates, the people will borrow less and even spend less. This will bring down the demand and increase the supply in its comparison. This in turn will bring down the prices of goods and services. Thus the government is keen to bring down the prices so that the entire nation doesn’t go through this price hike period for a long time.
However the efforts from the entire world are increasing to bring down inflation, the rumours for an onset of recession are kicking in. If this happens the mental stage of people will trigger them to sell heavily in the markets. If a recession kicks in then it is very difficult for the markets and even the economy to recover from the same. It can take from multiple months to even multiple years to get out from such a situation. The recent examples of the same are the 2008 Crisis, Dot Com Bubble, Great Recession in America etc. In all such instances there has been a very heavy sell off in markets and hence unwanted value loss is experienced.
What is Recession ?
As per the generally accepted definition, any economy that suffers from two consecutive quarters with negative GDP is termed to be under recession. In other words when the GDP of a nation decreases for two consistent quarters it is known as recession. This formula was derived by Julius Shiskin in 1974. However there are various factors that together determine the onset of recession.
Some of the major recession causing reasons are as follows :-
When the debt of an organisation increases above a certain level, then they are unable to foot the interest bills in time. The reason is the return earned from such loans is not enough to pay the interest bills. This was one of the major reasons for the 2008 crisis. People took on loans for buying houses and then defaulted on the interest payments.
Sudden Economic Shocks
When the economy experiences an unexpected shock like CoronaVirus then the entire world is put to a stop. In other words the entire world suffers from its effect. This causes job loss and hence people cannot fulfil their basic necessities. Due to this the entire economy is put into a stall zone or no movement zone. Such problems are heavily harmful to the economy as they create a huge financial crisis.
This phenomenon can be refereed with a major unemployment creation. The advancement in technology refers to increasing production at reduced costing. This makes labour obsolete or decreases the human workforce. Thus the entire situation causes heavy job losses and people can no longer fulfil their needs and requirements. The situation creates a short time period where the entire economy has to adjust to the transitioning phase of labour to automation.
Other reasons for recession can be over inflation or over deflation. When there is a heavy increase or decrease in prices of goods and services the situation of recession is created.
Recession is a direct outcome of degrowth in GDP. In other words when there is no growth in an economy for consecutive quarters then recession is bound to occur. However in the current situation especially in Indian markets the investments are coming in a very handful manner. Recession is not possible in such a situation. The reason is with increased investments, companies would be able to invest more into product lines and sales development. This would ensure higher profits and create a better business environment. Thus recession is not possible in India as per the current scenario. However there are chances of Stagflation.
Stagflation means a slow increase in inflation over time with increased unemployment in a small proportion. This does not have a major effect on the economy. However one needs to counter the same with a decrease in borrowing and bringing down the prices over a time period.
Indian Government and Inflation
The Indian Government is trying to take necessary actions to counter inflation. This has been seen by the rate hikes from the RBI. Shaktikanta Das even pointed out that there may be constant quarters with a rate hike to control the inflation and borrowings. Thus the direct effect is currently seen on Indian markets which are under a pressure from the bears.
In such a situation one should be satisfied with the growth Nifty50 and other indices are giving in the current scenario. The markets do not tumble for more than 10% even during the Russian- Ukrainian War situation of Sri Lankan Crisis or Inflation onset. This means that the economy of India is in a controlled Zone. Once the situation gets normalised, the market participants can definitely expect a constant bull run again. This will definitely come by the end of this year.