PIMCO stays neutral on Indian assets, sees RBI hiking rates by 75 basis points

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PIMCO neutral on Indian assets

Highlights

PIMCO expects the Reserve Bank of India to hike rates by 75 basis points this cycle, below market pricing of 100 basis points.
PIMCO remains neutral on Indian assets due to current valuations and uncertainties from oil prices and U.S. Federal Reserve policy.
RBI introduced FX measures including redirecting oil companies' dollar purchases and cash margins on FX hedges to stabilize the rupee, trading near 95 per dollar.

Rate outlook and investment stance

As reported by Reuters, PIMCO managing director and Asia portfolio manager Stephen Chang says the global bond manager expects the Reserve Bank of India to raise interest rates by a total of 75 basis points in the current tightening cycle. He says that view is below the roughly 100 basis points priced by markets, even after the RBI raised its key rate to 5.50% last week for its first increase in nearly four years and shifted to a calibrated tightening stance.

Chang says domestic conditions remain the main driver of the RBI's policy path, but U.S. Federal Reserve tightening and rupee stability also influence the central bank's decisions. PIMCO, which managed about $2.33 trillion globally at the end of June, says it remains broadly neutral on Indian assets because of current valuations and the cross-currents from oil prices and Federal Reserve policy dynamics.

India's overnight index swaps, a key gauge of rate expectations, imply a terminal repo rate of 6.25% to 6.50%, or 100 to 125 basis points of increases over 12 months. Chang does not specify the period over which PIMCO expects the 75 basis points of additional hikes to be delivered.

Rupee support measures and market risks

The Indian rupee, trading near 95 per dollar, remains under close watch after the RBI introduces measures to support the currency and says it is prepared to take further action if the decline accelerates. Since October 10, the central bank announces steps including redirecting oil companies' dollar purchases to a special facility and imposing cash margins on foreign exchange hedges for import liabilities and banks' own assets and liabilities.

Chang says those moves are designed to curb speculative pressure and limit the effect of elevated oil prices on the rupee. With Brent crude hovering near $105 a barrel, India faces added inflation and external-sector risks because of its dependence on imports.

RBI Governor Sanjay Malhotra says in a media interview on Tuesday that the measures are meant to ensure hedging is used for genuine needs rather than speculation. Chang says the actions also signal that the RBI is prepared to respond to excessive currency weakness as USD/INR approaches the 100 level.

In our earlier article, we covered how the Reserve Bank of India raised both its FY2027 growth and inflation forecasts while lifting the repo rate to 5.5% and shifting to a “calibrated tightening” stance. We also noted the main pressure points behind the RBI’s posture—food inflation risks tied to a weak monsoon and higher crude prices—and the accompanying steps to absorb liquidity and support the rupee, including open market operation sales and tighter FX regulations.

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