Tomorrow government security prices are expected to track the Federal Open Market Committee (FOMC) decision which is expected tonight. Analysts worldwide are expecting the FOMC to cut rate by 50 basis points to bring it down to 4 per cent.
A primary dealer said, "If the expectation is realised, we expect prices to rally by 15-20 paise across different maturities." Dealers, however, said that a sharp rally is not possible as the market has already discounted a major part of it.
The FOMC has already reduced theFed rate four times in this calendar year thereby bringing it down to 4.5 per cent from six per cent in the beginning of the year.
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Dealers said that there is already pressure on the Reserve Bank of India (RBI) to effect a bank rate cut on the back of a worldwide decline of interest rates and a rate-cut decision by the FOMC will put further pressure on the apex bank.
A dealer said, "Recently, European Central Bank and Bank of England have reduced the interest rates. A rate cut decision by FOMC will prompt the RBI to take a decision in this direction and it has already shown its intention of doing so by reducing the repo, reverse repo and the cash reserve ratio (CRR)."
The apex bank, however, has reduced the bank rates twice in the current calendar year -- on February 16 and March 1-- by 50 basis points each. As the finance minister has hinted repetitively, money market dealers expect the bank rate to drop by another 50 basis points and if FOMC cuts the rate, they said that there will be more pressure on the RBI to go for it.
The chief dealer of a new private sector bank said, "70-80 per cent of the impact is already discounted over the past one month. Hence, though the Fed rate cut decision will improve the market sentiment, it is unlikely to have a major impact on the prices."