Monetary Policy Review: June 2023

The Monetary Policy Committee (MPC) today unanimously decided to keep the policy repo rate unchanged at 6.50%. Accordingly, SDF and MSF rates were also maintained at 6.25% and 6.75% respectively. The monetary policy stance was also kept same (with majority of 5-1) reiterating that MPC remains “focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth”.

On Growth: Global growth has held up better than expected in CYTD despite multiple headwinds like elevated inflation, banking turmoil, tighter financial conditions and ongoing war. Specifically, in India, positive GDP growth surprise in Q4FY23 was led by improvement in net exports and robust capex activities. The high frequency activity signals indicate that growth remains buoyant supported by robust urban consumption and recovering rural demand. Healthy growth in steel and cement consumption, PMIs, credit growth, capital goods imports, etc. point at steady investment and industrial activity. On external front, robust services exports, to a large extent, has offset the impact of global trade slowdown.

GDP Growth (%)	Apr-23E	jun-23E
FY23 full year	7.0	7.2
Q1FY24	7.8	8.0
Q2FY24	6.2	6.5
Q3FY24	6.1	6.0
Q4FY24	5.9	5.7
FY24 full year	6.5	6.5

Source: RBI, MOSPI

RBI kept its growth forecast unchanged on expectations of (1) normal monsoon and good rabi crop production, (2) positive outlook on investment activity in view of government thrust on capex, healthy balance sheets of banks & private sector and improvement in capex intention by manufacturing sector and (3) improving business and consumer sentiments. Key risks to these estimates are – weak external demand, volatility in financial markets, intensity of El Nino, etc.

On Inflation: The CPI has decelerated sharply in the past couple of months primarily on account of favourable base effect. However, inflation momentum has also eased driven by softer food prices especially of cereals, protein items, spices, etc. along with moderation in prices of LPG, firewood, kerosene, etc. Core inflation decelerated too led by softening of inflation in clothing & footwear, household goods & services, personal care, etc.

CPI (%)	Feb-23E	Apr-23E
Q1FY24	5.1	4.6
Q2FY24	5.4	5.2
Q3FY24	5.4	5.4
Q4FY24	5.2	5.2
FY24 Average	5.2	5.1

Source: RBI

Given the weaker than expected momentum and recent CPI prints being lower than forecast, RBI revised down its CPI forecast marginally. However, RBI noted that inflation outlook remains fraught with uncertainty in view of possibility of El Nino and its impact on food prices, risk of oil prices rising, etc.

Conclusion and Outlook

RBI maintaining the status quo on rates and stance was largely in line with market expectations. However, RBI emphasis on bringing down the headline CPI to its target of 4% and not just within the tolerance band of 2%-6% was viewed as marginally hawkish. Hence, there was a minor reaction in yields post the policy announcement. The sub-5% inflation print for April 2023 has provided RBI more elbow room to assess the impact of cumulative rate hikes and policy tightening done till now. We continue to believe that RBI’s future course of actions will be lot more dependent on incoming data and it is not likely to restart rate hikes. RBI noted that surplus liquidity has increased in April-May 2023 (compared to Feb-March 2023), especially post the withdrawal of INR 2000 banknotes but it remains unevenly distributed. It has absorbed liquidity to the tune of INR ~1.5 trillion in past month. RBI, in our view, is likely to continue using short term liquidity absorption tools like VRRR until clarity emerges on the net liquidity likely to be retained in the banking system (on a steady state basis) after factoring in currency deposits and withdrawals.

Outlook: Since the start of FY24, yields have rallied significantly primarily driven by strong demand for SLR securities from long term buyers. The longer end yield rallied more than the shorter end, thus further flattening the curve.

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 global commodity prices. While growth has been resilient, it is likely to moderate led by slowdown in exports, decline in fiscal impulse and soft private consumption. External sector is comfortably placed with CAD expected to remain within manageable levels driven by lower oil prices and robust services exports. Further, adequate foreign exchange reserves should keep pressure on INR at bay. Also, RBI is likely to be maintain pause for an extended period and the bar for future rate hike(s) is high. All the aforesaid factors bode well for the fixed income markets.

Key risks to the outlook are elevated core CPI, resilient domestic growth, robust credit demand and continued global monetary tightening. Rise in geopolitical tensions, oil prices, lower Gsec demand from insurance sector and increase in issuance of state development loans (SDLs) in FY 23-24 are other important factors, which could 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
VRRR	Variable Rate Reserve Rep operation

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of 8 th June 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 June 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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