Bank of America Sees Opportunity in Indian Swaps Market as Rate Cut Expectations Delayed

Bank of America analysts predict that the Reserve Bank of India (RBI) will cut interest rates by 100 basis points over the next two years, in contrast with current market expectations of no rate cuts. This discrepancy presents an opportunity in the Indian swaps market, as traders have significantly delayed expectations for a rate cut.

The analysts attribute this gap to an overemphasis on geopolitical tensions and an underestimation of local easing price pressures. They expect inflation in India to align with the RBI's projection of 4.5% for the year, supported by expectations of contained food inflation. The two-year overnight index swap rate is expected to drop by up to 35 basis points over the next year, trading at around 6.65% as of Tuesday.

Why this matters: The divergence between Bank of America's rate cut prediction and market expectations highlights potential opportunities for investors in the Indian swaps market. The outlook on interest rates has significant implications for the Indian economy and financial markets.

Despite global market volatility, Indian assets, including the rupee and sovereign bonds, are viewed as relatively stable. The RBI's strategy to continue accumulating foreign exchange reserves is expected to support the rupee. Vikas Jain, Bank of America's head of India fixed income, currencies and commodities trading, believes the rupee will trade in the 82.5-84 per dollar range this year.

Jain also suggests that Indian government bonds in the 5-year to 7-year bucket look attractive due to positive carry and the RBI's liquidity management. He remains constructive on the Indian rupee and believes investors should position for a drop in the two-year overnight index swap.

Key Takeaways

• BoA analysts predict RBI will cut rates by 100 bps in 2 years, contrary to market
• Analysts cite easing inflation, expect 4.5% inflation in India this year
• 2-year OIS rate expected to drop up to 35 bps, trading around 6.65%
• Rupee to trade 82.5-84/$ this year, Indian bonds in 5-7 year bucket attractive
• Investors should position for a drop in 2-year OIS as market is too hawkish