Govt Securities Rebound As Fed Effects Rate Cut

Government security prices took a reverse turn today and went up by Rs 1.50-Rs 2 at the medium and long segment of the market as the Federal Open Market Committee reduced fund rates by 25 basis points to 1.75 per cent.

Prices have been falling continuously during the last four days after the Reserve Bank of India (RBI) conducted an open market auction of Rs 8,000 crore on December 7.

Yield of the 10-year benchmark, which went up to 8.25 per cent yesterday from a low of 7.76 per cent on December 7, fell to 8.01 per cent today. The dip in government security yields pushed down the forward premiums by 10-12 basis points across maturity, despite the Fed rate cut.

 

Market participants expect the RBI to follow the Fed decision by cutting the repo rate as the interest rate differential widened after the Fed rate cut, and this pushed up government security prices.

A dealer with a private sector bank said: "We do not see the possibility of a bank rate cut in the near future. But the cut in the repo rate is long due and the Fed rate cut has raised the hope further." The last time the RBI cut the repo rate was on May 27, when the apex bank reduced the repo rate by 25 basis points to 6.50 per cent. In its recent credit policy, the RBI had reduced the bank rate by 50 basis points to 6.50 per cent, but restrained itself from cutting the repo rate.

A primary dealer, however, said the sharp fall in prices in the aftermath of the open market auction was an over-reaction, and today's recovery is partly contributed by the correction to that.