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

New Delhi, [India] December 17 (ANI): 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)