Gilt Yields Remain Idle As Fed Cut Marked Already

The sixth cut in the Fed rate, by 25 basis points to 3.75 per cent in this calendar year, failed to boost the government securities market here as the impact of the rate cut had already been discounted in the market.

Yields of government papers, in fact, rose marginally before stabilising at yesterday's level.

The bankers expect the Reserve Bank of India (RBI) to cut the benchmark bank rate by 50 basis points over the next few weeks.

The RBI has cut the bank rate twice in this calendar year -- on February 16 and March 1 -- by 50 basis points each to seven per cent, but declined to cut it further though the central banks of other countries continued to reduce their benchmark rates.

The apex bank, however, brought down the repo and the reverse rate by 50 basis points in two stages to 6.5 per cent and 8.5 per cent, respectively.

The central bank, has reduced the cash reserve ratio (CRR) by 50 basis points effective from May 19 to 7.50 per cent.

The Federal Open Market Committee (FOMC) yesterday reduced the short term benchmark rate by 25 basis points to 3.75 per cent along with a cut in the discount rate by 25 basis points to 3.25 per cent to counter economic recession.

With this, the gap between Fed rate and bank rate has widened to 3.25 percentage point. Last year, the gap between Fed rate and bank rate was reduced to one per cent.

The beginning of the week saw yield on government securities dipping sharply as the market expected this Federal Reserve move.

The 10-year paper yield fell by more than 15 basis points to an all-time low of 9.50 per cent. Post rate cut, the yield remained unchanged.

A dealer said, "Securities were already oversold expecting the cut which will possibly be followed by a liquidity easing measures by the RBI -- a cut in the cash reserve ratio (CRR), repo or reverse repo rate -- if not the bank rate cut."

Economists, however, expect the RBI to follow the global trend and continue with liquidity easing measures as government finances figure showed that there is hardly any scope for fiscal stimulus to correct the ongoing economic slowdown.

Total expenditure of the Central government in April stood at Rs 16,702 crore against Rs 15,849 crore in the corresponding month of the previous fiscal.

Total receipt by the central government in the month was Rs 1,651 crore against Rs 3,050 crore in April 2000.