The fifth cut in the Fed rate in the calendar year has strengthened the possibility of a third cut in the bank rate by the Reserve Bank of India (RBI).
Dealers and analysts foresee a 50 basis point cut in the bank rate to 6.5 per cent by the end of the first quarter of the current financial year. A section of the market expects the apex bank to slash the bank rate on May 19 to coincide with the cut in the cash reserve ratio (CRR).
The Federal Open Market Committee (FOMC) yesterday reduced the short-term benchmark rate by 50 basis points to four per cent along with a cut in the discount rate by 50 basis points to 3.50 per cent to counter the economic recession.
With this, the gap between the Fed rate and bank rate has widened to 2.5 percentage point. Last year, the gap between Fed rate and bank rate was reduced to one per cent.
The government security market responded positively to the Fed rate cut as the dealers expect a bank rate cut to follow. The yield on the 10-year paper once again dipped to below 10 per cent. The yield slipped to 9.98 per cent today from 10.02 per cent yesterday. Last time it came down below 10 per cent was in March.
Though security prices moved up by 35-40 paise in the morning, they came down by 10-15 paise from the intra-day high due to profit-booking.
Analysts and economists feel that as the Indian economy is increasingly opening up to the outside world, domestic borrowers need access to funds at rates comparable to levels prevailing elsewhere in the world if they are to remain competitive. Recently, the Bank of England and European Central Bank have reduced the benchmark rates.
The Centre has been expected for a long time to cut down the bank rate to stimulate the economy. The economy, along with the rest of the world, has shown the signs of a slowdown.
According to the Central Statistical Organisation, the country
