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Business News/ News / India/  Rupee, bond prices surge as US Fed cuts rate in surprise move
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Rupee, bond prices surge as US Fed cuts rate in surprise move

A 50-basis point cut in US interest rates spurred a rally in other Asian currencies as well
  • Analysts expect similar policy action from central banks in European Union, Japan, UK
  • (Photo: Mint)Premium
    (Photo: Mint)

    MUMBAI: The Indian rupee and prices of 10-year government bonds rallied in early deals on Wednesday as the US Federal Reserve's surprise move to cut key interest rates boosted hope of easy monetary policies from other central banks across the world in the wake of the coronavirus outbreak.

    Rebounding from a 16-month low, the rupee, at 09:10 am, traded at 72.99 a dollar compared with Tuesday's close of 73.30. The unit had opened at 73.08 and so far today touched a high and a low of 72.95 and 73.16 respectively.

    Global financial markets have been spooked by the spread of COVID-19, commonly referred to as novel coronavirus, triggering risk-off sentiment and flights to safe haven assets.

    A 50-basis point cut in US interest rates overnight spurred a rally in other Asian currencies as well.

    In India, the yield on the 10-year government bond slumped 7 basis points after the Reserve Bank of India's governor Shaktikanta Das, in an interview with Bloomberg, said there was room to cut rates if needed.

    Yield on the 10-year bond fell 7 basis points to 6.285% from its previous close of 6.343%. Bond yield and prices move in opposite directions.

    For India, options include a rate cut and supporting the market through liquidity measures, Das had told Bloomberg News on Tuesday.

    Overnight, the US Federal Reserve slashed interest rates by half a percentage point in an emergency move since the 2008 financial crisis amid mounting concern that the coronavirus outbreak could stall the economic expansion. Following this, 10-year US bond yield slumped below 1%.

    "While we flagged up that Fed easing is imminent and likely to be frontloaded, we did not anticipate that Powell will react with this level of urgency. Unfortunately, the rate cuts have the unintended effect of sowing fears amongst market participants, instead of bolstering confidence", said DBS Bank report.

    The Fed rate cut was announced hours after the leaders of G7 pledged to take coordinated action to mitigate the economic slowdown in the aftermath of COVID-19.

    Analysts have not dismissed the possibility of similar surprises before the next monetary policy meetings in the European Union on 12 March, in Japan on 19 March and the UK on 26 March. Analysts believe that the Bank of Canada could also surprise with a larger rate cut at today’s meeting. Consensus estimate pegs overnight lending rate to fall 25 bps to 1.50%.

    "Overall, the expectations for other central banks to take the Fed’s cue would put pressure on the basket of currencies in the DXY. As far as volatility is concerned, now would be a good time to differentiate between speed and velocity", said DBS Bank in a note to its investors.

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    Published: 04 Mar 2020, 09:38 AM IST
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