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RBI Cuts Bank Rate by 50 basis points, CRR by 2 per cent

Its what the Bond Street wanted. After a harsh September, the bank rate cut has infused fresh life in the bond markets with an average gain of one rupee across the board. Thus, for bond fund managers, the unabated party (interspersed with few glitches) continues and is likely to boost short-term returns from bond funds

For bond fund investors and fund managers, this year is proving to be Manna from Heaven. The Reserve Bank of India cut bank rate for the third time in the current calendar this morning by 50 basis points to 6.5 per cent. The bank rate is lowest since May 1973. The rate cut is expected to ignite a fresh rally in the wayward bond market and enhance capital gains for bond and gilt funds.

The apex bank has also slashed the cash reserve ratio by a whopping 200 basis points to 5.5 per cent, thus releasing an additional Rs 6,000 crore into the system. Apart from the lowered bank rate, the fresh liquidity on the back of a lower CRR will ensure a fresh bout of buying in the bond markets. The CRR cut comes just a week after the RBI mopped up Rs 8,000 crore by way of gilt auctions that saw call rates spurt to 12 per cent. The interest paid on eligible CRR balances has also been hiked to 6.5 per cent, thus giving a fillip to banks' income.

The rate cut reflects that the Indian Central Bank is also now toeing the line of its global peers to pep up a faltering economy by bringing down interest rates. Though a section of the market did not expect bank rate cut, the immediate provocation seems to be a benign inflation, which tanked to the year's lowest at 3.18 per cent. However, the rate cuts have not been as aggressive as in the United States, where the series of nine rate cuts has brought down the key Fed Fund rate to 2.5 per cent.

Fund Managers' Expectations