25 bp cut factored in, gilts will take off with a 50 bp cut
The Federal Reserve meeting to decide on a base rate cut -- the 13th cut in a rate easing cycle which started in January 2001 -- is being closely watched by the Indian financial markets, both for clues on the long term outlook on interest rates as well as for whether the Reserve bank of India will cut the repo rate.
While the financial markets here have already factored in an 25 basis point cut in the Fed rate (from 1.25 per cent to 1 per cent), bond dealers look forward to the possibility of a 50 basis points which might result in a runaway rally in the government securities market.
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This, however, will not prompt the RBI to cut the repo rate as the Indian central bank is closely watching the inflation rate and the monsoon before announcing any cut in the short term repo rate.
A senior ICICI Bank treasury executive said that the market reaction is divided.
If the Fed cuts its rate by 50 basis points, it can definitely be concluded that the bias in favour of softer interest rates will continue for a longer period.
However, if a neutral policy is adopted on the rates, the longer term perspective on interest rates has to be reviewed.
Sudhir Joshi, treasurer, HDFC Bank, said: "The linkages of the globalised economy cannot be avoided. Therefore a rate cut by the Fed will necessarily put a downward pressure on interest rates in India."
On the other hand, S R Kamath, general manager, Securities Trading Corporation of India, feels that the rate cut will only provide a psychological effect with no likely immediate impact on bond yields.
"We tend to agree with the apex bank