Monetary Policy - February 2025

The Monetary Policy Committee (MPC) unanimously decided to lower the policy repo rate by 25bps to 6.25%. The Committee also decided unanimously to maintain policy stance at neutral and to remain “unambiguously focused on a durable alignment of inflation with the target, while supporting growth.”

The RBI Governor also stressed upon the point that RBI will ensure that there is sufficient liquidity in the system and will proactively take appropriate measures to ensure orderly liquidity conditions.

On Growth: The MPC statement highlighted that the global economy is growing below historical average even though recent high frequency indicators and continued expansion in world trade suggest resilience in growth. However, the global growth outlook is clouded by geo-political tensions and policy uncertainties.

Source: RBI, MOSPI, *CSO’s estimates

On domestic front the RBI noted that the high frequency indicators continue to send mixed signals where rural demand continues to improve while urban demand remains subdued. Against this backdrop, RBI expects recovery in private consumption should help achieve GDP growth of 6.4% YoY in FY25 (as per the First Advanced Estimate by the Central Statistics Office). Going forward, RBI expects that healthy rabi crop prospects, higher household consumption expected in lieu of income tax relief and recovery in fixed investments should help achieve a GDP growth rate of 6.7% YoY in FY26. However, RBI also cautioned that geo-political tensions, protectionist trade policies and volatile international commodity prices pose key downside risk to the growth outlook.

On Inflation: Headline CPI decelerated in November and December 2024 on back of falling food prices led by vegetables. RBI also noted that core inflation is subdued across goods and services, though it may have bottomed out.

Going forward, RBI expects that good kharif production, healthy prospects for rabi production and further cooling of vegetable prices should help ease food inflation further. Adverse weather conditions and volatility in international commodity prices pose key risk to this outlook. Further, core inflation might have bottomed out as per RBI but rise from hereon is expected to be moderate. In view of aforesaid, RBI marginally revised Q4FY25 and Q1FY26 inflation forecast to 4.4% and 4.5% respectively (average forecast for FY25 remains unchanged from December policy review at 4.8%). For FY26, the RBI expects CPI inflation to average at 4.2% YoY reaching a low of 3.8% in Q3FY26 before rising to 4.2% by Q4FY26.

Source: MOSPI, RBI; *actual

Conclusion and Outlook

While MPC decision was largely in line with consensus expectations, Gsec yields sold off by ~5 bps across most segments of the yield curve and reversed gain seen post budget announcement as the market expected a more dovish stance from the RBI.

As highlighted by RBI, CPI inflation is likely to fall from hereon and touch a low of 3.8% YoY by Q3FY26 (before rising marginally to 4.2% in Q4FY26). The market expects this rate cut cycle to be shallow with at most 25-50bps more of rate cuts. The RBI has reiterated that its rate actions will be data dependent from here on. This, coupled with the fact that the Government decided to stick to fiscal consolidation path in the recent budget, we believe, bodes well from the fixed income markets point of view.

In our view, medium term outlook on Indian fixed income market remains favourable, considering:

• Steady global growth and inflation drifting lower are likely to keep AE central banks’ monetary policy accommodative.
• Headline CPI is likely to trend towards RBI's target (4%) as pressure from food inflation dissipates in view of expectations of good crop productions. Also, domestic growth and Core CPI momentum remains subdued on back of moderating urban consumption.
• External sector could remain comfortable in view of steady growth in services exports, rangebound oil prices and adequate foreign exchange reserves. Pressure on INR likely to ease after witnessing increased volatility over the past few months.
• Government sticking to path of fiscal consolidation and reiterating to bring down its debt to GDP bodes well for supply of Gsec over the medium term
   

Key risks to the favourable outlook

• Consumption stimulus by Centre and states (which puts more money in the hand of consumers) along with persisting food price shocks - may keep CPI at an elevated level.
• Pressure on INR, if persists, might result in lower rate cuts compared to market expectations.
   

Overall, in our view, yields are likely to remain rangebound with a downward bias. Falling inflation and potential further cuts to the policy rate should be positive from yields perspective. Thus, in view of convergence of elevated short-term rates, attractive corporate bonds spreads (over Gsec), expectations of more rate cuts and improved liquidity, one may consider investment in medium duration (schemes with duration of upto 5 years) categories especially corporate bonds focused funds. Further, investors with a relatively longer investment horizon, could continue to increase allocation to longer duration funds in line with individual risk appetite.

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of 7th February 2025 are based on internal data, publicly available information and other sources believed to be reliable. The source for this document is the Bi-monthly Monetary Policy Statement, 2023-24, dated 7th February 2025 published by the RBI. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and is not investment advice. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. HDFC Mutual Fund/HDFC AMC is not guaranteeing/ offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s). Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accept any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice.

 

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