Bank of America Forecasts a 25 Basis Points Rate Reduction in June and Does Not Anticipate Aggressive Easing – Here’s Why a Hold is Looming
BoA Securities Anticipates Cautious 25 bps Rate Cut by RBI in June
Bank of America (BofA) Securities has indicated that a careful 25 basis points reduction in interest rates by the Reserve Bank of India (RBI) is projected for the upcoming June meeting. The firm underscores the importance of strategic patience, as economic growth appears stable and inflation is under control.
In their outlook preceding the RBI’s Monetary Policy Committee (MPC) gathering next month, BofA Securities pointed out that although a 25 bps rate decrease is likely, there is no immediate impetus for the central bank to aggressively signal the markets towards more extensive easing. With GDP growth remaining within anticipated levels and inflation expected to stay within target parameters, Rahul Bajoria, Head of India and ASEAN Economic Research at BofA Securities, noted that the rationale for more substantial rate cuts doesn’t seem robust. “The RBI can continue to progress through the cycle, yet we believe there’s no requirement to audibly signal significantly deeper cuts at this juncture. This suggests that the markets may be overestimating the easing trajectory for the time being. In fact, the RBI could shift its focus towards effectively transmitting prior cuts,” he stated.
The Necessity for Strategic Patience
In contrast to chess strategies, monetary policy does not revolve around zero-sum dynamics. BofA Securities emphasized that for the RBI, it may be appropriate to implement policy adjustments while also exercising strategic restraint as the economic cycle gradually matures, necessitating patience to achieve desired results.
This year, the central bank has introduced noteworthy liquidity enhancements while continuing to lower interest rates. Although there is room for future cuts, BofA asserts that further reductions may not be warranted given that GDP growth aligns with forecasts at this time.
BofA stated, “The RBI can continue to advance the cycle, but we believe there is no pressing need for aggressive guidance toward additional cuts. This could imply that markets are possibly overvaluing the easing cycle right now. The RBI could well begin concentrating on transmission to make prior cuts more impactful.”
Liquidity and Interest Rates as Primary Tools
BofA Securities views the RBI’s policy framework through the lens of three core instruments: liquidity (represented by the rook), interest rates (the knight), and foreign exchange (the bishop) for policy interventions. Analysis shows that the RBI has primarily focused its easing measures on liquidity and interest rates, allowing the forex market to remain flexible in line with the trilemma.
This approach illustrates the central bank’s ongoing commitment to easing as it progresses toward the midpoint of its easing cycle. BofA believes the RBI is poised to maintain its current outlook, adhering to projections of sluggish growth and subdued inflation. While the market anticipates an additional 60 bps in rate cuts, the RBI is likely to adopt a cautious stance, tailoring the magnitude and timing of any adjustments based on incoming data.
BofA has forecasted that the repo rate may ultimately settle at 5.5 percent in this cycle. Currently, the RBI estimates FY26 GDP growth at 6.5 percent, slightly exceeding BofA’s prediction of 6.3 percent. Despite the potential for short-term downgrades to inflation forecasts, BofA cautioned against significant reductions, attributing the inflation dips primarily to perishable food prices that can rebound swiftly. Between December 2024 and March 2025, the RBI enacted a three-pronged approach to easing by cutting the policy rate in February, implementing substantial liquidity measures, and offering regulatory leniency to banks, which consequently shifted market sentiment regarding the policy landscape.
