BofA: RBI expected to cut interest rates by 100 bps

The Reserve Bank of India (RBI) may reduce interest rates by 100 basis points starting in December as inflation approaches its four per cent target, according to a Bank of America (BOfA) official.

Vikas Jain, head of fixed income at the bank, mentioned that if inflation stabilises at 4 per cent, the repo rate could potentially drop to 5.50 per cent. Core inflation has been consistently lower recently.

The rate easing cycle in India, the third-largest economy in Asia, is expected to start with a 25-basis-point cut in December, according to Jain, in line with market expectations.

He is calling for a total of 100 basis points in rate cuts by March 2026, which is more aggressive than the consensus forecast of 50-75 basis points.

The central bank, meeting this week, is likely to maintain the benchmark repo rate at 6.50 per cent for the ninth consecutive time.

Retail inflation in India increased to 5.08 per cent in June, while core inflation dropped to 3.1 per cent, nearing a record low, as reported by economists.

The central bank anticipates inflation to average around 4.5 per cent for the fiscal year ending in March.

The RBI recently revised its estimate of the neutral rate for the economy to 1.4-1.9 per cent, up from the previous range of 0.8-1.0 per cent. This wider range allows for more potential rate cuts, according to Bank of America’s Jain.

A treasury official predicts that India’s 10-year benchmark bond yield will decrease to 6.70 per cent by December and suggests buying during price corrections.

Jain is optimistic about overnight index swaps due to the high one-year and two-year rates. The current curve is pricing in rate cuts cautiously.

Additionally, the temporary nature of India’s banking liquidity surplus may prompt the central bank to use FX forwards to regulate liquidity.

Attribution: Reuters