By Deepak Jasani, head of retail research at HDFC Securities
The RBI MPC (Monetary Policy Committee) voted 5-1 to keep policy repo rate unchanged at 6.5 percent on April 5, maintaining status quo for the seventh time. The MPC is resolute in its commitment to align the CPI to its target of 4 percent as uncertainties in food prices continue to pose challenges. The MPC continued with the ‘withdrawal of accommodation’ stance (with 5:1 majority) to ensure that inflation progressively aligns to the target, while supporting growth. The GDP and inflation forecast for FY25 were maintained at 7 percent and 4.5 percent respectively.
Although the growth has continued to sustain its momentum surpassing all projections, headline inflation has cooled and core inflation has been the lowest in the past nine months, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation. The RBI Governor highlighted global risks from debt overloads and geopolitics, and the recent upturn in oil prices. The RBI retained its inflation forecast for FY25 at 4.5 percent. However, it revised down Q1 forecast by 10 bps to 4.9 percent, and Q2 and Q4 forecast by 20 bps to 3.8 percent and 4.5 percent, respectively.
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Liquidity conditions have improved in recent weeks and the overnight rate (WACR- weighted average call rate) has moved closer to the repo rate. Increased Government spending and foreign inflows due to the inclusion in the JP Morgan bond index are supportive to liquidity conditions.
During the first three quarters of 2023-24, India’s current account deficit (CAD) narrowed significantly on account of a moderation in merchandise trade deficit coupled with robust growth in services exports and strong remittances. India continues to be the largest recipient of remittances in the world.
Domestic economic activity continues to expand at an accelerated pace, supported by fixed investment and improving global environment. The purchasing managers’ index (PMI) for manufacturing displayed a sustained expansion in February-March, touching a 16-year high. The services sector has exhibited broad based buoyancy with all sectors registering strong growth. The second advance estimates (SAE) placed real GDP growth at 7.6 percent for 2023-24, the third successive year of 7 percent or higher growth.
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The 10-year G-sec yields rose to 7.11 percent from its previous day close of 7.09 percent post the announcement as monetary transmission of past actions continues to be work in progress. The money market, however, is understandably a bit cautious in the very short term given pick up in global rate volatility and the recent rise in oil prices.
Despite the buoyant GDP growth and declining inflation trajectory, the RBI MPC remains steadfast ensuring that inflation aligns durably and sustainably to its target and will continue to be actively disinflationary. Recent uptick in fuel prices, expectation of a harsh summer and continuing geo-political tensions pose upside risk to commodity prices and supply chains. Consequently, a rate cut soon remains unlikely. We expect a rate cut perhaps in Q2/Q3FY25 but that too would be data dependent.
Equity markets would be largely indifferent to the policy outcome as there were no major surprises in it.
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