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Published on 16/03/2020 10:49:50 AM | Source: Live Mint

Bond prices surge 11 bps after US Fed cuts rates to near zero

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Indian bond prices on Monday rallied nearly 11 basis points (bps) on expectations that the Reserve Bank of India (RBI) may take emergency steps in line with the US Federal Reserve's move where it cut interest rates to near zero. The gains were also supported by fall in crude oil prices that are likely to reduce inflation, leading to less fiscal worries.

Yield of 10-year bond fell 11 bps to 6.197% from its previous close of 6.322%. Bond yield and prices moves in the opposite direction.

Analysts expect at least a 50 bps cut in the next monetary policy outcome of the RBI due on 3 April. The RBI will provide $2 billion of dollar liquidity to lenders via a forex swap on Monday.

On Sunday, the US Federal Reserve swung into action to offset the impact of the COVID-19 outbreak, commonly known as the novel coronavirus, on the country's economy by slashing its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least $700 billion.

"This is a positive signal sent that the Fed is there to support the economy on account of the spread of the virus and consequent impact on domestic growth. Lower rates would mean that funds are available for borrowing; and enterprises impacted by distortions in supply chains or loss of export markets would have access to cheaper funds", an analyst said.

Crude oil was down nearly 3%, and it has fallen 50% so far this year.

"Inflation will moderate in India, import bill come down further with the dual impact of lower prices and demand , and government revenue can get affected – states more than Centre. There can be revisions in tax rates at the end of the government to protect tax revenue", said CARE Ratings in a note to its investors.

CARE expects crude prices to be between $40-45/bbl, which can go below the 40 mark if the spread of coronavirus increases as there are no output cuts in the offing.

Meanwhile, the Indian rupee traded 74.13 per US dollar, down 0.3% from its previous close on Friday.