Monetary Policy Review: April 2023

The Monetary Policy Committee (MPC) today unanimously voted in favour of keeping the policy repo rate unchanged at 6.50%. Accordingly, SDF and MSF rates were also maintained at 6.25% and 6.75% respectively. The MPC made marginal tweak in its stance (with majority of 5-1) and mentioned that it remains “focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth” as against the earlier text of “….inflation remains within the target….”.

On Growth: RBI noted that India’s growth remains resilient as reflected in healthy expansion in industrial activities like IIP, growth in core industries, etc. along with robust services activities visible in passenger traffic, e-way bills, toll collections, port freight traffic, etc. PMIs also point towards sustained expansion in both manufacturing and services sector.

GDP Growth (%)	Feb-23E	Apr-23E
FY23 full year	7.0	7.0
Q1FY24	7.8	7.8
Q2FY24	6.2	6.2
Q3FY24	6.0	6.1
Q4FY24	5.8	5.9
FY24 full year	6.4	6.5

Source: RBI, MOSPI

RBI marginally revised its growth forecast in view of sustained buoyancy in contact intensive consumption, government thrust on capex, robust credit growth, expectations of record rabi crop, moderation in commodity prices supporting manufacturing sector, etc. However, the drag of external demand, tight global financial conditions, flareup in geopolitical tensions, etc. poses risk to the outlook.

On Inflation: The CPI inched up higher in the past couple of months driven primarily by higher cereal, milk and fruit inflation. Core CPI remained at elevated level led by rise in prices of personal care and housing which was partially offset by moderation in clothing, footwear and transportation & communications inflation.

CPI (%)	Feb-23E	Apr-23E
Q4FY23	5.7	NA
FY23 Average	6.5	NA
Q1FY24	5.0	5.1
Q2FY24	5.4	5.4
Q3FY24	5.4	5.4
Q4FY24	5.6	5.2
FY24 Average	5.3	5.2

Source: RBI

RBI marginally revised down its average inflation forecast for FY24 possibly due to lower oil price assumption (USD 85 per barrel vs USD 95 per barrel before) and higher than estimated inflation in Q4FY23. While expectation of record rabi crop production bodes well for the food inflation trending lower, the unseasonal rainfall can impact output of key crops. Further, the easing cost pressure has resulted in pace of output prices moderating. The outlook is subject to significant uncertainty regarding oil prices and lagged pass through of input costs.

Conclusion and Outlook

The pause by MPC, against the consensus expectations of 25 bps rate hike, resulted in yields rallying by 5 to 15 bps. RBI governor in its statement and in the press conference highlighted that it is the “pause for this meeting” and it should not be construed as pivot. The minor tweak in language of stance possibly reflects the RBI’s resolve to bring down the inflation toward its target of 4%.

Outlook: In our note published on 17th March 2023 titled “Fixed Income Outlook - Time to Accumulate”, we argued that given the uncertainty over financial stability in major AEs in view of banking failure and to assess the impacts of already done rate hikes, there is strong case for RBI to pause. Today’s MPC decision was largely in line with our view. For future course of actions, RBI is likely to remain data dependent and will continue monitoring impact of already done rate hikes in coming months. In our view, the bar for future rate hike(s) is high and therefore, an extended pause seems probable at this stage.

Going forward, several factors seem favourably placed for the fixed income markets. CPI has eased from the peak and is likely to ease further in view of softening momentum, lower input price pressure and correction in international commodity prices. Further, growth is also likely to moderate driven by slowdown in exports, fiscal impulse declining and private consumption normalising. While external sector is a risk, it is likely to improve sequentially as the net oil imports decline on back of lower oil prices. Further, easing of USD from the peak and adequate foreign exchange reserves, should take pressure off INR to a large extent, although outlook on capital flows remain uncertain. On the fiscal side, announced budgeted market borrowings for FY24 were in line with market expectations and alleviated concerns on Gsec supply. Adding to this, most of major central banks including RBI seem to be close to their peak policy rates, in our view. All the aforesaid factors are likely to bode well for the fixed income outlook.

Key risks to aforesaid view are elevated core CPI, resilient domestic growth, robust credit demand and continued global monetary tightening. Heightened geopolitical risks, elevated oil prices, tight liquidity and increase in issuance of state development loans (SDLs) in FY24 are other important factors which can keep the yields at elevated levels.

On an overall basis, in our view, yields are likely to trade in a range with a downward bias. While we continue to recommend investments into short to medium duration debt funds, investors could consider higher allocation to longer duration funds in a staggered manner, in line with individual risk appetite.

Glossary

CPI	Consumer Price Index
CAD	Current Account Deficit
CRR	Cash Reserve Ratio
GDP	Gross Domestic Product
MSF	Marginal Standing Facility
OMO	Open Market Operations
RBI	Reserve Bank of India
SDF	Standing Deposit Facility
SLR	Statutory Liquidity Ratio
WPI	Wholesale Price Index

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of 6 th April 2023 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, 2022-23, dated 8 th February 2023 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 and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

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