India’s central bank is anticipated to commence a monetary easing cycle, potentially cutting interest rates by 100 basis points starting in December, as inflation trends towards the 4% target, according to the head of fixed income, currencies, and commodities at Bank of America India, Mr. Vikas Jain. He indicated that with inflation approaching 4% and based on real rate assumptions, the repo rate could drop to 5.50%. He noted, “Core inflation is consistently showing lower prints.” The initial cut in December is expected to be 25 basis points, aligning with market expectations. However, He forecasted 100 basis points in rate reductions through March 2026, which is more aggressive than the consensus of 50-75 basis points.
The central bank, scheduled to meet this week, is projected to maintain the benchmark repo rate at 6.50% for the ninth consecutive meeting. Retail inflation in India rose to 5.08% in June, while core inflation decreased to 3.1%, nearing a record low. The Reserve Bank of India anticipates average inflation of around 4.5% for the fiscal year ending in March. Last month, the central bank revised its neutral rate estimate to approximately 1.4%-1.9%, up from the previous range of 0.8%-1.0%. This broader neutral rate range suggests the potential for additional rate cuts. He also expects India’s 10-year benchmark bond yield to decline to 6.70% by December and advises buying during price corrections. He remains optimistic about overnight index swaps due to elevated 1 year and 2-year rates and conservative rates cut pricing. Additionally, given the variable nature of India’s banking liquidity surplus, He suggested the central bank might use FX forwards to manage liquidity.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.
