According to I-Sec: "Though there was widespread expectation of a cut in the bank rate, the timing took marketmen by surprise. Most participants expected the rate cut to follow a hard budget that targeted lower fiscal deficit and consequently contained the quantum of government borrowings. By administering the rate cut ahead of the budget, the central bank has indicated its conviction towards the need for lower rates in the economy."

I-Sec believes that the RBI will monitor developments on three fronts before deciding on further cuts. First, the response in the currency market, particularly the trend in capital flows. Second, the direction of monetary policies in the global economy, and finally, the budget initiatives, which are critical in determining the sustainability of lower interest rates.

The first and second have been conducive to lower rates since the start of this calender year and market expectations of a favourable budget direction remain strong. I-Sec said: "The gilts market reacted uncertainly to the rate cuts. Coming at the end of a week that saw steady dips in bond prices, especially at the long-end of the yield curve, the rate cut announcement pushed prices up by 70-80 paise. However, profit bookings at higher levels caused a correction before prices bounced back to just below their highs.

The popular 11.30 per cent 2010 security, which traded at Rs 107.00 (10.13 per cent YTM, s.a.) after the announcement, is currently at Rs 106.95 (10.14 per cent)." "Call money rates rose to touch 9.75-10 per cent on Friday as liquidity steadily tightened after the Rs 3,000 crore auction outflow on Monday. Repo subscription dried up and liquidity adjustment through reverse-repos was resorted to. Availed Tier-I refinance also rose steadily to more than Rs 10,000 crore currently. However, callrates dropped to 7.50-8 per cent on Saturday -after a rate cut- amid thin volumes." said I-Sec.

The CRR cut becomes effective only next week and given that there are only around Rs 650 crore of coupon inflows (net of T-bills) in the current week, I-Sec expects call rates to harden from current levels.The ways and means advances to the Union government for the week ending February 9, stood at Rs 3,007 crore. Adjusting for coupon payments since then and for the previous week's Rs 3,000 crore issuance, I-Sec does not expect any pressure on the WMA limit in February. Consequently, I-Sec does not expect further Gilt issuance in the current week.