Citi strategist Rohit Garg notes that following the Reserve Bank of India's monetary policy review on Wednesday, the offshore swap market could reduce its implied rate hike for India by late 2027 from around 80 basis points to 60-65 basis points, or even lower.

Over the next few months, the yield on the 10-year Indian government bond is expected to fluctuate near 6.75%. In the medium to long term, concerns over global capital costs and competition for capital may add a premium to the 10-year bond yield.

Inflows related to foreign currency non-resident deposits (FCNR) are likely to support purchases of overnight index swaps (OIS) or Indian government bonds for about a month, with this support potentially unaffected by changes in global yields.

Lower energy prices and a weaker US dollar will benefit Indian local currency assets. The combination of FCNR inflows and declining energy prices is expected to gradually strengthen the rupee. Citi sees room for the rupee to appreciate to 94 against the US dollar in the short term.