CONSUMER DISCRETIONARY SECTOR IN INDIA (Major Macroeconomic Factors)

Gross Domestic Product (GDP)

Consumer Discretionary stocks are highly sensitive to the business cycle. Since these goods are not necessary for sustenance, a recession would imply decreased demand for consumer discretionary goods and hence a possible fall in the price of these stocks. These goods also have a high price elasticity to demand, implying that minor changes in prices can cause huge changes in demand. Any recessionary signals would induce consumers to spend less and save more, foregoing expenditure on non - essential items. Companies dealing in motor vehicles, media subscriptions, etc. would face a severe demand crunch during these times.

INFLATION

As can be observed from the graph below, the performance of the consumer discretionary sector is inversely related to inflation rates. Inflation is detrimental to the sector. Consumer discretionary products are highly price elastic in nature. This implies that even a tiny change in prices can cause a huge change in demand for these goods, adversely affecting the sector's revenues. A sharp drop was witnessed in inflation rates in the year 2018 as food prices cooled down. This had a positive impact on the consumer discretionary sector. High inflation, along with monetary tightening to combat the same, adversely affected the sector in 2022–2023.

INTEREST RATES

A drop in interest rates can be beneficial to the consumer discretionary sector. Low interest rates translate into low costs of production and further into lower prices, boosting demand and spending by consumers. Discretionary spending on cars, electronic equipment etc also increase as loans for the same can be availed at lower rates of interest. Accommodative monetary policies implemented by Central Banks across countries led to a decline in interest rates IN FY 21. Subsequently interest rates across the globe have been on the rise to help combat inflation rates, adversely affecting consumer spending.

EXCHANGE RATES

An increase in exchange rates will be favorable for export oriented sectors within consumer discretionary, such as auto and textiles. However, this can also raise the cost of production by making imports more expensive. If the latter occurs, demand for these goods will fall on account of high prices and cause a dent in the stock's value.

COMMODITY PRICES

The performance of the consumer discretionary sector is inversely related to commodity prices, as can be seen in the graph. Increased commodity prices directly translate to higher production costs. Since this sector is highly price elastic, any rise in prices leads to a sharp fall in demand. Higher commodity prices can also erode the disposable income of individuals, leading them to spend less on discretionary items such as cars, media, etc.