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Bimal Jalan Finally Delivers

It was a three in one boost for debt markets as bank rate, repo rate and cash reserve ratio were all cut by 25 basis points. The ten year benchmark promptly dived below 7 per cent to touch 6.92 per cent.

Markets welcomed the three rate cuts with enthusiasm, as the yield on the 10-year benchmark (7.40% 2012) sank below the 7 per cent mark. The RBI cut the key bank rate, cash reserve ratio and repo rate by 25 basis points each. While the bank rate and repo rate cut were very much in line with the market expectations, the cut in cash reserve ratio came as a surprise, considering the surfeit of liquidity in the market. This is likely to release Rs 3000 crore in the market. Call rates came down to 5.40-5.50 per cent by the weekend.

Overall the yield curve moved down by a sharp 8-15 basis points over the week. The bullish sentiment remained, as a day after the Policy, the RBI governor sent signals of another round of cut in repo rates. Trading volumes at the wholesale debt segment of NSE crossed Rs 8000 crore on the same day, though the level came down to Rs 3483 crore by the end of the week.
On the forex front, the domestic currency gained 6 paisa over the week. This was mainly on account of huge corporate and foreign fund inflows.

In the corporate bond market, the spread between 5-year AAA bond and the GOI security got further suppressed to 55 basis points as against the 67 basis point last week.

The immediate reaction to cut in the three benchmark rates came from that segment of the market, which has been longing for it -- the banks. SBI cuts its deposit rates by 50 basis points, which was soon followed by a 25 basis point reduction in the PLR. Various leading banks like Central Bank of India and Union Bank of India followed this.

The lower interest rates have helped the government too. The Policy itself states that nearly two-third of borrowings could be completed at low cost through long-dated papers, without impacting on interest rates levels.

Well, it would be a matter of time, as to who eventually benefits from these rate cuts, but for bond fund investors its surely time to celebrate. The average bond fund was up 0.56 per cent during the week. This is the highest weekly increase since the start of this fiscal.

Outlook
Ahead of the Rs 7,000 crore auction due for the week, much of the activity will be concentrated on the long end of the curve. However, this may dampen liquidity initially but is likely to be compensated by the inflow resulting out of the maturity of few securities. Call rates are also likely to rule firm.