While the Reserve Bank of India (RBI) is not expected to cut interest rates until December this year, economists believe a shift in its policy stance could happen sooner.
“We were of the view that the earliest that RBI would probably have a change in stance is in December, followed by a rate cut in February…Markets were anyway, not factoring in a rate cut in October. It’s more like a more dovish talk, which I still feel is kind of possible,” said B Prasanna, Head of Global Markets Group at ICICI Bank.
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Prasanna pointed to key factors underpinning their forecast, including a favourable global environment, falling oil prices, and easing inflation—particularly in goods linked to China’s economic slowdown.
Neeraj Gambhir, Group Executive and Head of Treasury, Markets at Axis Bank, agreed that a December rate cut looks unlikely but didn’t rule out a change in stance if inflation data for September to November is softer.
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“Core inflation is soft. What is spoiling the party is the vegetable prices. If we see over the next three months that headline inflation numbers are somewhat softer than what RBI has forecasted, there is a possibility that we might see a change in the stance in the month of December. I’m not expecting a rate cut as yet,” he said.
Both Prasanna and Gambhir expect bond yields to decline from current levels but not fall below 6.25%.
“You need to have a view of repo rate at 5.5% if you have to believe 6% on the 10-year (bond) is possible,” he said.
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His base case is 6.25% on two-year bonds, and 6.5% on 10-year bonds.
Despite no immediate rate cuts, bond yields have already fallen to 6.8% from 7.2%, driven by improved liquidity and India’s inclusion in global bond indices.
Gambhir echoed this, stating, “For me, it’s difficult to think about anything lesser than 6.5% for 2025. Until we have a clear view around rate cuts, it’s difficult to imagine a 10-year bond yield lower than repo rate plus some spread,” Gambhir said.
The rupee is expected to remain in the range of 83.75 and 85 to a dollar for the year.
The RBI’s next Monetary Policy Committee meetings are scheduled for October 7-9, December 4-6, and February 5-7.
