India's central bank is likely to reduce interest rates by 100 basis points in a monetary easing cycle starting in December, as inflation approaches the 4% target. Vikas Jain, Head of Fixed Income, Currencies, and Commodities at Bank of America, India, shared this prediction on Tuesday, August 6
"Once inflation hits 4%, the repo rate could reach 5.50% based on the real rate assumption," Jain noted. "Core inflation consistently shows lower figures."
Jain foresees the easing cycle in Asia's third-largest economy beginning with a 25-basis-point cut in December, aligning with market expectations. However, his projection of 100 basis points in cuts by March 2026 exceeds the common consensus of 50-75 basis points.
This week, the central bank is expected to maintain the benchmark repo rate at 6.50% for the ninth consecutive time.
In June, India's retail inflation rose to 5.08%, while core inflation dropped to 3.1%, nearing a record low. The central bank predicts an average inflation rate of around 4.5% for the fiscal year ending in March.
Last month, the Reserve Bank of India adjusted its estimate of the neutral or real rate for the economy to approximately 1.4%-1.9%, up from the previous 0.8%-1.0%. This broader range allows for more rate cuts, according to Jain.
Jain expects India's 10-year benchmark bond yield to decrease to 6.70% by December and advises buying during price corrections.
He remains optimistic about overnight index swaps, noting that the one-year and two-year rates are high, and the curve is conservatively pricing in rate cuts.
Additionally, the temporary nature of India's banking liquidity surplus suggests that the central bank might manage liquidity through FX forwards, Jain added.
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