Interest Rate Turnaround in India: Bank of America Predicts Drastic Rate Cuts

India's central bank could cut interest rates by up to 100 basis points as part of a monetary easing cycle. According to Bank of America, measures are expected to begin in December, once inflation approaches the target rate of 4%. During an interview statement, Vikas Jain, head of Fixed Income, Currencies, and Commodities at the bank in India, emphasized that a reduction of the repo rate to 5.50% is possible, once inflation hits this mark, due to consistently lower core inflation values. According to Jain, the rate cut cycle in Asia's third-largest economy is expected to start with a 25 basis point reduction in December, reflecting market opinion. However, Jain's forecast of a total reduction of 100 basis points by March 2026 is steeper than the consensus, which expects a cut of 50-75 basis points. The central bank, which is meeting this week, is expected to hold the key interest rate at 6.50% for the ninth time in a row. India's retail inflation rose to 5.08% in June, while core inflation dropped to 3.1%, moving closer to a record low, supporting the central bank's inflation forecast of an average of 4.5% for this fiscal year. Last month, the Reserve Bank of India estimated that the neutral or real interest rate for the economy had risen to around 1.4%-1.9%, higher than the previous estimate of 0.8%-1.0%. According to Jain from Bank of America, a larger range of the neutral interest rate opens up room for further interest rate cuts. Jain expects the yield on India's 10-year benchmark bond to fall to 6.70% by December and recommends buying during price declines. Additionally, he remains positive on overnight index swaps, as one- and two-year rates are elevated and this curve conservatively prices in rate cuts. Due to the temporary nature of the banking liquidity surplus in India, the central bank could also intervene in liquidity management through the use of foreign exchange forwards, Jain predicts.