Monetary Policy Review: February 2024
8th February 2024
The Monetary Policy Committee (MPC) decided to maintain status quo on both policy rate and
stance with a majority of 5 to 1. Thus, repo rate was kept unchanged at 6.5% and stance of focussed
on “withdrawal of accommodation to ensure that inflation progressively aligns with the target, while
supporting growth” was retained. Consequently, SDF, MSF and CRR rates were also kept
unchanged at 6.25%, 6.75% and 4.5% respectively. Notably, one of the external MPC member
voted for reduction in repo rate by 25 bps and changing the stance to neutral.
On Growth: The current state of global economic activity across major economies presents a varied
landscape. The odds of soft landing have increased
with steady overall growth and inflation easing, although GDP Growth
Dec-23E Feb-24E
(%)
geopolitical risks have increased. RBI noted that
FY24 full year 7.0 7.3*
elevated levels of public debt in a high interest rate
Q1FY25 6.7 7.2
environment poses a pertinent risk to global financial
Q2FY25 6.5 6.8
stability. In India, growth has been strong, evidenced by Q3FY25 6.4 7.0
robust manufacturing and services PMIs, healthy Q4FY25 NA 6.9
construction activity, resilient external sector and FY25 NA 7.0
buoyant services sector fuelled by both domestic and Source: RBI, *MOSPI
global demand.
The outlook is optimistic, with the RBI anticipating a 7% GDP growth in FY25 driven by the resilient
services and urban consumption. The positive trajectory is further supported by signs of rural
recovery strengthened by allied activities. Additionally, the uptick in residential housing, government
focus on capital expenditure, and robust corporate profitability augur well for the investment outlook.
On Inflation: CPI has moderated in the FYTD24 aided by broad based easing in core CPI and fuel
inflation. Food prices, especially vegetables, continue to CPI (%) Dec-23E Feb-24E
remain volatile and keeping headline inflation high. The Q3FY24 5.6 5.4*
CPI forecast is clouded by substantial uncertainty, Q4FY24 5.2 5.0
primarily stemming from the risk of disruptions in the FY24 Average 5.4 5.4
supply chain and the potential price effects of the Q1FY25 5.2 5.0
ongoing geopolitical crisis. Additionally, food prices Q2FY25 4.0 4.0
remain vulnerable to weather-related events. Q3FY25 4.7 4.6
Q4FY25 NA 4.7
Although the RBI kept its average inflation forecast for
FY25 Average NA 4.5
FY24 unchanged at 5.4%, it adjusted its estimate for Source: RBI; * actual
Q4FY24 downwards by 20 basis points to 5%. The RBI
anticipates CPI to decrease to an average of 4.5% in FY25, contingent upon the expectation of a
regular monsoon season.
Conclusion and Outlook
While the status quo policy rate was largely expected, no announcements to improve liquidity came
in as a marginally negative surprise to the market. RBI highlighted that it would continue to actively
modulate both frictional and durable liquidity through appropriate mix of instruments. Further, RBI
emphasized the endeavour to achieve inflation target of 4% on durable basis and highlighted that
rates transmission is still incomplete. Overall, the monetary policy was perceived marginally hawkish
and led to yields rising slightly.
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Monetary Policy Review: February 2024
Notwithstanding today’s policy decision, we believe outlook for fixed income markets remains
favourable over the medium term due to following key drivers:
• The lower-than-expected market borrowings and likelihood of robust Gsec demand due to India’s
inclusion in the JP Morgan bond index – is likely to keep demand-supply favourable in FY25.
Government’s commitment to fiscal consolidation in FY26 is likely to provide more confidence.
• Core CPI momentum remains subdued driven by lower input price pressure and benign global
commodity prices. Further, headline CPI is likely to ease and Inflation expectations also remain
well anchored.
• Major global central banks, especially the US Fed, have indicated the end of the rate hiking cycle
and are likely to start easing in due course. RBI is also expected to eventually reduce the policy
rate in the coming quarters.
• India’s external sector vulnerability remains low due to high foreign exchange reserves,
rangebound oil prices, robust services exports and the likelihood of FPI inflows into the debt
markets in FY25.
Key risks to the aforesaid outlook are:
• SLR holdings of the banking system are high and credit growth is robust. With interbank liquidity
in deficit, the incremental demand for G-Secs is likely to remain muted.
• RBI’s policy rate can remain higher than expected due to multiple reasons including (1) food
price shocks keeping headline CPI elevated, (2) rise in commodity prices due to escalation in
geopolitical crisis, (3) monetary policy globally remaining tight for a period longer than expected,
among others.
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 is a good time to increase allocation to longer duration funds
in line with individual risk appetite. Further, given a flat yield curve and elevated short-term rates
along with expectations of rate cuts in the coming year, one may also consider investment in short to
medium duration debt funds.
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Monetary Policy Review: February 2024
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
SDL State Development Loans
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 8th February 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 8th February 2024 published by the RBI. 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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