The US Federal reserve rate cut came in as a big surprise to many Indian bankers who were expecting a mere 25 basis-point cut for sure.
?The 50-bps cut, both on the Fed rate and the Fed discount rate has only endorsed the brevity of the economic situation in the US and renewed hopes of a faster recovery,?? said a treasury head of private sector bank.
Bankers, however, do not expect the Reserve Bank of India to cut domestic rates as fallout of Fed move.
This is despite the interest rate differential on deposits across maturities widening between the US and India.
Equity and currency markets across the globe rallied and the dollar started dwindling against major currencies including the rupee.
The rupee gained sharply after opening with a wide gap at 40.34 as against its previous close of 40.48 a dollar. The currency closed at the day?s high of 40.20 amid talks that the Reserve Bank of India intervened to prevent a sharper appreciation.
Dealers are mixed over the sustainability of the rally. Most bankers were of the opinion that the rupee would remain where it ended Wednesday. ?The rally was more in sympathy due to the more-than-expected Fed rate cut, ? said a dealer at a private bank.
?The market had factored only a 25 bps cut. A 50 bps cut, was most unexpected,?? said K Harihar, head treasury, Development Credit Bank. ?Interest rates indicate there is a major slowdown. Going forward, say 45 days to three months from now, one could see another round of Fed rate cut,?? said Parthasarathi Mukherjee, president Axis Bank. The move has widened the interest differential between the US deposits rates across maturities and domestic deposits rates, dealers said.This has led to a belief that domestic currency market could witness huge inflows of foreign exchange.
The RBI therefore is now likely to face the challenge of managing liquidity and at the same time maintain the dollar-rupee parity, said a dealer.
Meanwhile the government bond market ended nearly flat after displaying some price appreciation in early trades. But the rally was short-lived, dealers said. The ten-year benchmark bonds opened at 7.79% from its previous close of 7.89%.