Has the interest rate peaked of late? The last rate hike came in February 2023, and ever since the Reserve Bank of India (RBI) has been on a pause. Given that inflation has stayed within RBI’s upper tolerance band of 6 per cent for the last six months, when do you anticipate the next rate cut?
The policy rates have peaked and are headed directionally down. The timing and quantum of the down move will depend on multiple internal and global factors. From a policy rate perspective, the concensus is 50-75 basis points (bps) of rate cuts over the next 12-15 months. This, combined with incrementally easier liquidity conditions, would effectively translate into 75-100 bps of policy rate cuts over the same time.
How do you interpret macroeconomic trends, such as the government’s focus on fiscal consolidation, and their impact on the bond market?
The macroeconomic conditions, specifically the continuous quantitative and qualitative improvements in twin deficits (fiscal deficit and current account deficit) augur well for medium-term core inflation prospects and, hence, medium-term policy rates and interest rates as well. A reducing fiscal deficit combined with a falling current account deficit trajectory, as has been the case since financial year 2021-22, has led to incremental easing of core inflationary pressures in the economy. Lower core inflation automatically feeds into lower headline inflation and, in turn, aids lower interest rates. This is already visible along with the impending bond inclusion story to a fair degree on the longer end of the yield curve (10 years and beyond). The shorter end of the yield curve (1-5 years) could incrementally react much more positively to actual rate cuts and easing liquidity conditions over the next year or so.
Yields are on a downward spiral. Do you think the market has started factoring in future rate cuts?
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