India's central bank is set to embark on a monetary easing cycle, with expectations of a significant interest rate reduction starting in December 2024. Mr. Vikas Jain, head of fixed income, currencies, and commodities at Bank of America India, has indicated that the central bank may cut interest rates by up to 100 basis points through March 2026. This anticipated easing comes as inflation trends towards the Reserve Bank of India's (RBI) 4% target.

Inflation Trends and Repo Rate Projections

Currently, core inflation in India is showing consistent lower prints, contributing to the expectation of a repo rate cut. Retail inflation had risen to 5.08% in June 2024, but core inflation has decreased to 3.1%, nearing a record low. Given these inflation trends, the repo rate could potentially be reduced to 5.50%. An initial rate cut of 25 basis points is anticipated in December, aligning with market expectations, with a more aggressive forecast of a total reduction of 100 basis points through March 2026.

The central bank is scheduled to meet this week and is projected to maintain the benchmark repo rate at 6.50% for the ninth consecutive meeting. However, the broader neutral rate range has been revised to approximately 1.4%-1.9%, up from the previous 0.8%-1.0%, suggesting room for further rate cuts.

Market Impact and Investment Strategies

Mr. Jain also forecasts that India’s 10-year benchmark bond yield will decline to 6.70% by December 2024. He advises investors to consider buying during price corrections due to the anticipated rate cuts. Additionally, he expresses optimism about overnight index swaps, citing elevated 1-year and 2-year rates and conservative rate cut pricing as positive factors.

Given the variable nature of India's banking liquidity surplus, Mr. Jain suggests that the central bank might utilize foreign exchange (FX) forwards to manage liquidity effectively.

Conclusion

The anticipated monetary easing cycle by India's central bank reflects a strategic move to address inflation and stimulate economic growth. With projected rate cuts and adjustments in bond yields, investors are advised to stay informed about market trends and consider strategic investments during this period of anticipated economic shifts.

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