Bankers expect the US Federal Reserve to announce at least a 25 basis point cut when policy makers meet Tuesday. Treasury heads of various Indian and foreign banks told FE that the US credit markets have already discounted the rate cut. Back home, no impact of the rate cut is likely.
Some bankers also expect a similar reduction in the Fed discount rate which was recently brought down to 5.75% from 6.25%.
“There is a slowdown in the US economy and if the Fed doesn?t bring down rates, the economy is more likely to get into a recession,? said a treasury head at a foreign bank.
A few bankers and analysts are more bullish on a steeper cut of 50 basis points but majority are for a 25 bps cut.
?The Fed may not go for a 50 bps rate cut for the simple reason that this would signal that the economy is in deep crisis,? said a treasury head at a private bank. ?Even if the situation demands a steep cut, the Fed might do so in stages or at its next meet,? he added.
In the meanwhile, dollar six-month Libor fell from Thursday?s 5.75% level to 5.50% on Monday. A few treasury dealers were of the view that the Libor rate eased due to Fed cut expectations.
There is also a demand from some Indian banks to cut the Bank Rate from the present 6% levels to 5.75% due to the slowdown in industrial output. Most bankers however ruled out the possibility and opined that the Reserve Bank of India was unlikely to give into such a demand, more so whenthe inflation is pressured upwards.