Monetary Policy Review - June 2024

The Monetary Policy Committee (MPC) voted to keep the policy rate and stance unchanged, with a majority vote of 4 to 2, compared to 5 to 1 in the April 2024 meeting. Thus, repo rate was maintained at 6.5% and stance remained focussed on “withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth”. Consequently, SDF, MSF and CRR rates were also kept unchanged at 6.25%, 6.75% and 4.5% respectively. Notably, 2 external members dissented and voted in favour of rate cut of 25 bps and changing the stance to neutral.

On Growth: Global growth remains resilient and outlook favourable driven by likely rebound in the global trade. India’s growth also remains robust supported by continued investment buoyancy, recovery in consumption and favourable net exports. High frequency indicators also suggest growth momentum sustaining as reflected in high PMIs, healthy industrial and credit growth and buoyant services sector. External sector continues to remain stable.

GDP Growth (%)	Apr-24E	Jun-24E
FY24	7.6	8.2*
Q1FY25	7.1	7.3
Q2FY25	6.9	7.2
Q3FY25	7.0	7.3
Q4FY25	7.0	7.2
FY25	7.0	7.2

Source: RBI, *MOSPI, actual

In view of better than expected growth, RBI revised up its GDP growth estimate to 7.2%, up 20 bps from last MPC. Likely revival in rural sector driven by expectations of normal monsoon along with continued strength in manufacturing and services sector should aid the growth momentum. Investment spending is also likely to be healthy in view of high capacity utilisation, improvement in business sentiments and government’s thrust on infrastructure spending. Key risks to this outlook include rise in geopolitical tensions and surge in commodity prices.

On Inflation: Headline inflation has moderated sequentially but remains within a narrow range since past few months and above RBI’s target of 4%. The food inflation, key driver of elevated inflation, continues to remain broad based and high led by pulses and vegetables. Fuel inflation has eased on back of reduction in LPG prices while core inflation continues to decelerate.

CPI (%)	Apr-24E	Jun-24E
FY24 Average	5.4	5.4*
Q1FY25	4.9	4.9
Q2FY25	3.8	3.8
Q3FY25	4.6	4.6
Q4FY25	4.5	4.5
FY25 Average	4.5	4.5

Source: RBI, *actual

RBI kept its average inflation forecast for FY25 unchanged at 4.5% on expectation that food inflation is likely to ease, driven by new crop arrivals and expected normal monsoon. RBI emphasised that while headline inflation could fall below 4% in Q2FY25 primarily due to favourable base effect and CPI is expected to climb back above 4% from Q3FY25 onwards. It also noted that core inflation remains susceptible to rise in input prices.

Conclusion and Outlook

Today's MPC meeting maintained the status quo, with no major change in rates, stance, or liquidity. As a result, bond yields remained largely unchanged following the policy announcement. RBI Governor reiterated the MPC's commitment to achieving a 4% inflation target and emphasized that the RBI’s policy decisions are driven by domestic developments, not by a "follow the Fed" approach.

Notably, the increase in dissenting votes from one to two may be considered marginally positive sign for yields, despite the overall unchanged policy stance.

In other recent developments, the incumbent government won the 2024 general election with a significantly lower majority. Hence, going forward, the pace of fiscal consolidation is a key thing to look out and thus, in this context, the full year FY25 budget (expected in July 2024) assumes even more importance.

Barring aforesaid uncertainty, in our view, fixed income remains favourably placed over the medium term, considering:

• Windfall gain due to higher-than-expected RBI dividend and expectations that it can remain at an elevated level in next year as well - should aid fiscal consolidation and keep market borrowings within manageable levels.
• Inclusion of India’s sovereign securities in JP Morgan global bond indices bodes well for demand outlook for G-Sec in FY25 and can effectively cap any significant rise in yields.
• Core CPI momentum remains subdued on back of lower input price pressure.
• External sector remains comfortable in view of likely recovery in global merchandise trade, steady growth in services exports and adequate foreign exchange reserves.
• In view of central banks like ECB, Bank of Canada, Swiss National Bank, etc. recently reducing rates and domestic core inflation easing, RBI may also cut rates in H2FY25, although, we expect the rate cut cycle to be a shallow one.

There are following risks to the favourable outlook

• Regular food price shocks keeping headline CPI at an elevated level; sustained growth momentum can result in core inflation reaccelerating.
• Robust credit growth and elevated SLR holdings can keep the incremental demand for G-Secs from banks subdued.
• Rise in commodity prices driven by escalation of geopolitical tensions and / or buoyant economic activity in China.

Overall, in our view, yields are likely to trade with a downward bias and the long end of the yield curve is likely to outperform over the medium term. Thus, as highlighted in past, for investors with a relatively longer investment horizon, it still remains a good time to increase allocation to longer duration funds in line with individual risk appetite. Further, given a flat yield curve and elevated shortterm rates along with expectations of rate cuts in FY25, one may also consider investment in short or medium duration categories of debt funds.

Glossary

BPS	Basis points (1 bps = 0.01%)
CPI	Consumer Price Index
CAD	Current Account Deficit
CRR	Cash Reserve Ratio
GDP	Gross Domestic Product
MSF	Marginal Standing Facility
PMI	Purchasing Manager Index
RBI	Reserve Bank of India
SDF	Standing Deposit Facility
SLR	Statutory Liquidity Ratio
AE	Advanced Economies
GST	Goods and Services Tax

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of 7th June 2024 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 June 2024 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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