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India Special Coverage: RBI keeps rates unchanged

20 Feb 2024

James Cheo

Chief Investment Officer, Southeast Asia, India HSBC Global Private Banking and Wealth

Key takeaways

  • The Reserve Bank of India (RBI) kept the key policy rate unchanged at 6.5% at the February 8th monetary policy meeting.  The RBI also decided to continue its policy to withdraw monetary accommodation, to ensure that inflation remains on downward trajectory.
  • In the press conference, RBI Governor Das highlighted that the RBI expects growth to remain steady despite global headwinds. The RBI raised its FY25 GDP growth forecast to 7.0% (vs 6.5% previously) which would be the third successive year of growth above 7.0%.
  • We continue to be optimistic about India’s economic growth and remain bullish on Indian equities, Indian local currency bonds and the Indian rupee (INR).

What Happened?

The Reserve Bank of India (RBI) kept the key policy rate unchanged at 6.5% at the February 8th  monetary policy meeting. The RBI also decided to continue its policy to withdraw monetary accommodation to ensure that inflation remains on downward trajectory. It further flagged that transmission of monetary policy to credit markets was still incomplete, which reduces the odds of any rate cut in the next meeting in April.

The RBI raised its FY25 GDP growth forecast to 7.0% (vs 6.5% previously) which would be the third successive year of growth above 7.0%. The central bank forecasts inflation to decline to 4.5% for FY 24-25. In the press conference, RBI Governor Shashikanta Das highlighted that while the central bank expects India’s macro-economic picture to remain resilient, they are also actively monitoring the impact of global and geopolitical developments.

In our assessment, the broad tone suggested that though the RBI is comfortable with the GDP growth, they need to see more progress on inflation before cutting interest rates. In particular, the RBI is focussed on food inflation, given its significant weightage in the CPI index, as the delayed sowing of crops raises the risk of a renewed spike in food prices. 

That said, the fiscal discipline in the interim budget announced earlier this month, with plans to reduce fiscal deficit and government borrowing, is a positive. It alleviates the risk of inflationary impulse fueled by government spending and should allow the RBI to cut rates later this year. 

India’s economic activity remains resilient, with robust consumer demand and an expected increase in capital expenditure, as indicated in the recent budget announcement. The RBI expects services sector to be resilient and construction demand to rebound, helped by housing demand and renewed government focus on capex. 

Investment implications

We expect India’s economy to be resilient, helped by the strong domestic consumption and high-quality government spending, as indicated by the projected increase in capex in the latest budget. The looming national elections in the first half of 2024, may lead to temporary slowdown in private sector capital expenditure, before an acceleration in the second half of 2024.  

We retain our overweight on Indian equities. In the near-term, we acknowledge the risk of markets trading in a choppy manner, as any profit-taking by international investors is likely to be counterbalanced by strong systematic domestic flows. Although valuations for Indian equities remain elevated, double-digit earnings growth and robust economic growth should support the markets. From a style perspective, we prefer large-caps over small-and-mid-caps which could be more susceptible to investor flows and could see greater volatility, especially after the strong performance last year.

We are bullish on Indian local currency bonds as they are likely to outperform other Emerging market counterparts helped by (i) attractive absolute yields, which are higher than several other EM counterparts, (ii) potential for price appreciation as the RBI rate cuts should lead to a reduction in yields, and (iii) steady inflows from the recent inclusion in global Emerging Market Bond indices. 

We expect INR to be largely stable.  The RBI has prioritised USD/INR stability over the past few quarters and is likely to lean against substantial INR strength.

Source: Refinitiv Eikon
Source: Bloomberg, HSBC Global Private Banking as of 8 February 2024. Past performance is not a reliable indicator of future performance.
Source: Bloomberg, HSBC Private Banking as on 8 February 2024. Past performance is not a reliable indicator of future performance.

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