Monetary Policy Review - April 2025

The Monetary Policy Committee (MPC) unanimously decided to lower the policy repo rate by 25bps to 6% and to change policy stance from ‘neutral’ to ‘accommodative’ and noted that “rapidly evolving situation requires continuous monitoring and assessment of the outlook.”

The RBI Governor further explained that given accommodative stance further action will only be a hold or cut in policy interest rates.

On Growth: The MPC statement highlighted that the global uncertainties have increased significantly due to tariff related measures and can have material impact on growth inflation dynamics globally.

Source: RBI, E= Estimate

On domestic front the RBI noted that rural demand has been robust, and prospects appear bright given expectation of a good rabi crop and normal monsoon.

Urban consumption demand too has seen some pick - up recently. The uptick can be sustained on back of fiscal support. This should be further supported by pick-up in Government capex and private investment. However, headwinds from global trade disruptions remain key risk to the growth outlook. Taking all this into account, the RBI revised down its growth forecast for FY26 by 20bps to 6.5%.

On Inflation: The MPC statement noted that Jan-Feb CPI inflation print was lower than projected due to sustained fall in food prices led by vegetables. Core inflation however inched up slightly due to rise in gold prices.

Source: RBI

Going forward, RBI noted that the outlook for food inflation has turned ‘decisively positive’ driven by favourable rabi crop prospects and a record wheat and pulses production in this season. This along with strong kharif arrivals will set a stage for a ‘durable softening in food inflation’. Moreover, a sharp decline in inflation expectations and fall in crude prices also augurs well for inflation trajectory going forward. Taking all this into account average CPI inflation for FY26 is now projected at 4% (20bps lower than the projection made in February policy review).

Conclusion and Outlook

While RBI’s decision was largely in line with expectations, change in stance and dovish tone during the press conference resulted in G-sec yields rallying by 5-7bps.

As highlighted by RBI, CPI inflation is likely to remain below RBI’s mid-point target of 4% till Q3FY26 (before rising to 4.4% in Q4FY26) and noted that there is a ‘decisive improvement in inflation outlook.’ The markets now expect this cycle to be deeper than earlier anticipated with at least 50bps of more rate cuts this cycle. RBI’s dovish stance, Government sticking to fiscal consolidation and downgrade of growth bode well from fixed income market perspective.

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

• Headline CPI is close to RBI's target (4%) and outlook too is favourable on back of good rabi prospects and normal monsoons. Also, domestic growth and Core CPI momentum remains subdued on back of moderating urban consumption.
• Comfortable liquidity conditions will result in better transmission of rates
• External sector could remain comfortable in view of steady growth in services exports and decline in oil prices. However, pressure on INR needs to be closely watched 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 G-Sec over the medium term
• Global growth likely to take a significant hit due to imposition of tariffs by the US
   

Key risks to the favourable outlook:

• If a trade war leads to increase in overall prices of goods in the short term
• Uneven distribution of monsoon resulting in rise of food prices
• Meaningful depreciation of INR resulting in imported inflation
   

Overall, in our view, yields are likely to trade with a downward bias. Falling inflation and further potential policy rate cuts could be positive from yields perspective. Thus, in view of convergence of short-term rates, attractive corporate bonds spreads (over G-Sec), expectations of more rate cuts and improved liquidity, one may consider investment in medium duration (schemes with a Macaulay 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.

Some Fund Categories that investors could consider investing based on their individual risk appetite and investment horizon:

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of 9th April 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, 2025-26, dated 9th April 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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