By Dharamraj Dhutia
MUMBAI (Reuters) – India’s central bank may cut interest rates by 100 basis points in a cycle of monetary easing likely to begin in December as inflation eases towards its 4% target, an official said fixed income portfolio from Bank of America, in India.
“When inflation reaches 4%, and based on the real rate assumption, there is a chance that the repo (rate) will reach 5.50%,” Vikas Jain, head of fixed income, currencies and commodities at the bank, said in an interview on Tuesday. “Core inflation is consistently showing lower results.”
The rate easing cycle in Asia’s third-largest economy is expected to begin with a 25 basis point cut in December, Jain said, reflecting the market’s view.
However, its call for 100 basis point rate cuts by March 2026 is more pronounced than the consensus view of 50-75 basis point reductions.
The central bank, which meets this week, is expected to maintain the base repo rate at 6.50% for the ninth consecutive time.
India’s retail inflation rose to 5.08% in June, but underlying inflation fell to 3.1%, close to an all-time low, according to economists. The central bank forecasts average inflation of around 4.5% this fiscal year ending in March.
The Reserve Bank of India last month estimated that the neutral rate or real rate for the economy has risen to around 1.4%-1.9%, higher than its previous estimate of 0.8%-1.0%.
A wider neutral range of rates leaves room for more rate cuts, Bank of America’s Jain said.
The Treasury official expects the yield on India’s benchmark 10-year bond to decline to 6.70% by December and recommends buying whenever there is a correction in prices.
It remains positive on overnight index swaps as both one-year and two-year rates are elevated and this curve is conservatively pricing rate cuts.
However, the transitory nature of India’s excess bank liquidity means the central bank could choose to intervene through foreign exchange contracts to manage liquidity, Jain said.
($1 = 83.8950 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)
