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India's Rate Cycle Bottom: Why Bond Yields and Capital Flows Look Supportive

Axis Bank Research presents a constructive outlook for India's economy. Their report suggests interest rates have hit their lowest point for now, but government bond yields could still fall further. They highlight that India's external finances are stable, helped by strong services exports and a competitive rupee. Overall, the view is one of resilience despite ongoing global uncertainties.

Key Points: Axis Bank Sees India Rates Bottomed, Yields Easing, Stable External Balance

  • Policy rates seen at cycle bottom with limited room for further RBI cuts
  • 10-year bond yields projected to drift towards 6% by FY27 on supply-side measures
  • External balance remains stable with a manageable current account deficit forecast
  • Capital outflows are near a cyclical bottom, expected to improve in the coming fiscal year
3 min read

India policy rates at bottom; bond yields, capital flows outlook supportive: Axis Bank Research

Axis Bank Research forecasts India's policy rates have bottomed, with bond yields set to ease further and capital flows improving, supporting a stable macroeconomic outlook.

"India policy rates have likely bottomed, but 10Y G-Sec yields may move lower. - Axis Bank Research Report"

New Delhi, December 17

India's macroeconomic outlook remains constructive even as global uncertainties persist, with policy rates seen at their lowest feasible point in the current cycle, bond yields likely to ease further, and external balances remaining stable, according to the India Economic Outlook 2026 report by Axis Bank Research.

The report notes that "India policy rates have likely bottomed, but 10Y G-Sec yields may move lower," reflecting weak underlying inflation pressures and the need to improve monetary transmission.

While the Reserve Bank of India (RBI) has limited space for further rate cuts, the report expects that "supply-side measures (like issuing more T-bills and shorter-duration bonds) can reduce steepness of the yield curve," with 10-year yields projected to "drift towards 6% in FY27." The report says that excessive duration extension in government borrowing has kept long-end yields elevated and that a recalibration could lower economy-wide borrowing costs.

On the external front, the report highlights that "India's external balance is stable, USD-INR weakness helps," noting that the recent depreciation has pushed the real effective exchange rate (REER) to competitive levels. It adds, "We do not see an unduly stressed Balance-of-Payments," as pressures from higher gold imports and a recovering non-oil deficit are offset by weaker oil prices and a strong services surplus. The current account deficit is expected to widen only marginally to "1.2/1.3% of GDP in FY26/27."

A key pillar supporting the external balance is services trade. The report states that "growth in services exports remains robust, offsetting primary income outflows." It points out that "India's services exports grew 13% YoY" in September 2025, easing concerns around potential headwinds from US policy changes. Even earlier, in the June 2025 quarter, "modern services grew 22% YoY," helping maintain a services surplus that "helps keep CAD in check and supports GDP growth."

Capital flows, which have been volatile over the past year, are also expected to stabilise. According to the report, "capital outflows are close to cyclical bottom, likely to improve in FY27." It attributes recent foreign portfolio investor (FPI) outflows to global rotation towards AI winners and benchmark reweighting rather than structural concerns about India. As earnings stabilise and benchmark weights recover, the report expects passive inflows to return.

On the rupee outlook, the report underscores that "mild, not wild depreciation remains the base case going ahead." While the RBI has allowed greater flexibility after heavy intervention, the report expects a gradual adjustment path, with the rupee projected at "90/USD by June 2026 and 92/USD by June 2027." The report adds that a weaker REER and ongoing reforms could "incentivise fresh inflows over time," limiting the risk of disorderly depreciation.

Overall, the report says that India's macro fundamentals remain resilient, supported by policy stability, strong services exports and improving capital flow dynamics, even as global headwinds persist.

- ANI

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Reader Comments

A
Arjun K
Good to see a detailed report. The point about government borrowing strategy keeping long-term yields high is crucial. Recalibrating this can lower borrowing costs for businesses and boost investment. A practical suggestion from Axis Bank research.
R
Rohit P
"Mild, not wild depreciation" – that's the key phrase for the rupee. As an exporter, a slightly weaker rupee helps, but volatility is the real killer. Stability in capital flows is what we need to see on the ground. Fingers crossed for FY27.
S
Sarah B
While the macro picture looks constructive, I hope the benefits percolate down. The report talks of economy-wide borrowing costs falling, but will MSMEs and homebuyers actually see cheaper credit? That's the real test of monetary transmission.
V
Vikram M
The resilience of our services sector is truly impressive. 22% YoY growth in modern services is no joke! This is creating high-quality jobs and bringing in forex. It's a solid buffer against global uncertainty. Bharat's IT and services story is still strong 💪.
K
Karthik V
A respectful critique: Reports like these often sound optimistic. The assumption of "weaker oil prices" is a big variable. Any geopolitical shock can upset the entire external balance calculation. We need to build more domestic resilience beyond just services.

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