9 Aug 2024
James Cheo
Chief Investment Officer, Southeast Asia and India, HSBC Global Private Banking and Wealth
Abhilash Narayan, CFA
Investment Strategist, HSBC Global Private Banking and Wealth
The RBI Monetary Policy Committee (MPC) meeting was broadly in-line with market expectations, which had gradually positioned for the no-cut scenario following the last CPI print. 10-year bond yields and USD/INR were largely unchanged at the time of writing.
In the meeting, RBI’s Monetary Policy Committee (MPC) kept the benchmark repo rate unchanged at 6.5%. Similar to the previous meeting, the decision on interest rates was based on a 4-2 vote, with Prof. Verma and Dr. Goyal voting for rate cuts. The RBI also maintained its stance of “withdrawal of accommodation” with a 4-2 vote as well.
The RBI also released the updated growth and inflation forecasts. In the press release, it maintained FY 25 (Apr 2024-Mar 2025) GDP growth forecast unchanged at 7.2%, projecting relatively steady growth between 7.1% - 7.3% across the upcoming quarters.
Source: Budget documents HSBC Global Private Banking and Wealth as of 5 August 2024. Past performance is not a reliable indicator of future performance.
The MPC highlighted the strong industrial production as well as sustained momentum in manufacturing and services activities point towards steady urban demand.
The RBI said that while inflation has moderated the progress has been uneven – largely due to sticky food inflation. Steady progress in monsoon (c. 7% above long-term average) and sowing of crops (3% higher y-o-y), adequate buffer foodgrain stocks and easing of global food prices were highlighted as potential positives by the RBI.
RBI Governor Shaktikanta Das highlighted that food inflation remained “stubborn” and said that “without price stability, high growth cannot be sustained”. He also highlighted that unlike some other central banks like the US Federal Reserve (Fed) who have dual mandates of managing inflation while ensuring maximum employment, RBI’s official mandate is to ensure price stability. In our opinion, this indicates that RBI is likely to remain firmly focused on inflation, especially since the GDP growth remains robust.
The RBI also highlighted concerns around banking system stability, the elevated loan-to-deposit ratio and greater reliance of banks on wholesale funding which could lead to liquidity and asset-liability mismatch. We could see more measures by policymakers in future to address this issue.
In our assessment, the RBI is comfortable with the GDP growth but needs to see more progress on inflation before cutting interest rates. The RBI is focused on food inflation, given its significant weightage in the CPI index. Hence, we now expect RBI to cut rate in 4Q 2024.
Despite edging modestly lower after the RBI meeting, it is worth noting that Indian equities have outperformed global and US equities year-to-date. While this creates a risk of near-term underperformance due to profit-taking by foreign investors, we remain overweight on Indian equities. Robust earnings growth, superior RoEs and strong domestic investor base should help Indian equities outperform over the next 6-12 months.
Source: RBI, HSBC Global Private Banking and Wealth as of 5 August 2024. Past performance is not a reliable indicator of future performance.
We believe the Union Budget was largely supportive for the outlook for Indian equities - fiscal consolidation should support investor confidence, welfare measures should boost domestic consumption and continued high-quality capex and construction spending should boost long-term growth potential and job creation. From a sector perspective, we retain our preference for Financials, Consumer Discretionary and Industrials.
For the bond market, 10-year Indian government bond yields were largely unchanged following the RBI meeting given that the “hold” was largely priced-in. RBI guidance on 8 August does not change our bullish stance on Indian local currency bonds. Continuation of strong index inclusion inflows and lower supply announced in the Union Budget create favourable demand-supply dynamics, offsetting negative impact from potential delay in the RBI rate cuts.
Our expectation of largely stable oil prices and RBI’s proactive management of INR volatility should lead to stable USD/INR, with modest INR appreciation potential towards the end of 2024.
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