Most bankers least expected the US Federal Reserve rate cut of 50 basis points to 4.75%. Treasury heads of various banks said the market had expected a more modest Fed rate cut of 25 basis points and it had already factored that in days ahead of the official announcement late on Tuesday.
?The market had expected a similar cut on the Fed discount rate cut, too, but now it is steeper by 50 bps,” said an obviously elated chief dealer at a private bank. The Fed discount rate?the rate at which banks get cash against bills of exchange?is now at 5.25%.
The move has widened the interest differential between US deposits rates across maturities and domestic deposits rates, dealers pointed out.
The domestic foreign exchange market, as a result of the Fed rate cut, opened on Wednesday with a wide gap. The rupee appreciation was largely sentiment driven as the US currency had weakened against major currencies globally. The rupee, which ended Tuesday at 40.48 to the dollar, opened the day with a gap of fourteen paise, at 40.34.
The domestic currency gained further and ended at 40.20 to the dollar on renewed hopes of increased dollar inflows through foreign institutional investors, a rise in corporate borrowings overseas, of which a part is currently permitted to be repatriated. Dealers said the Reserve Bank of India intervened to halt the rupee rally but there were no official confirmations.
Dealers expect the rupee to gain further on Thursday.
