India's central bank could cut interest rates by 100 basis points in a monetary easing cycle that is likely to start in December as inflation eases towards its 4% target, a fixed income official at Bank of America, India said.
"Once inflation reaches 4%, and based on the real rate assumption, there is chance for repo (rate) to 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 prints."
The rate easing cycle in Asia's third-largest economy should begin with a 25-basis-point cut in December, Jain said, mirroring the market view.
However, his call for 100 basis points of rate cuts through March 2026 is steeper than the consensus view for reductions of 50-75 basis points.
The central bank, which meets this week, is expected to hold the benchmark repo rate at 6.50% for a ninth straight time.
India's retail inflation rose to 5.08% in June but core inflation slipped to 3.1%, near a record low, according to economists. The central bank sees inflation averaging around 4.5% this fiscal year that will end 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 rate range opens up space for more rate cuts, Bank of America's Jain said.
The treasury official expects India's 10-year benchmark bond yield to ease to 6.70% by December and recommends buying whenever there is a correction in prices.
He stays positive on overnight index swaps as the one-year and two-year rates are elevated, and as this curve is pricing in rate cuts conservatively.
Meanwhile, the transient nature of India's banking liquidity surplus means the central bank could choose to intervene through FX forwards to manage liquidity, Jain said.
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