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Another bank rate cut seems to be in the offing. As per a report by ICICI Securities (I-Sec) a bank rate cut of 50 basis points by the RBI can be expected by the end of the current quarter. The downward trend in inflation, weakening demand position, sluggish pace of non-oil imports and stable to lower oil prices and the likelihood of further downward movement in global interest rates contribute to this outlook.

Due to the easy liquidity position the call rats are expected to hover between 7-8 per cent range through the week. As per the report the current bout of excess liquidity can be traced to the huge expenditure by the Government in the first two weeks of April. Though Rs 13,130 crore of market funds (Rs 10,000 crores from auctions plus Rs 3,130 crore from on-tap sale) have flown out ever since, liquidity overhang still exists. The comfortable patch of liquidity is expected to continue.

If the report proves correct then this would be the third rate cut this year. Even before the Finance Minister, Mr Yashwant Sinha's Budget soiree was over, the Reserve Bank of India had raised a toast with a 50-basis point Bank Rate cut, the second in a fortnight, to 7 per cent. The RBI had cut the Cash Reserve Ratio (CRR) too on February 16 by 50 basis points from 8.5 per cent to 8 per cent effective in two stages. The first reduction of 25 basis points (8.50 per cent to 8.25 per cent) was effected on February 24 and the second 25-basis points cut to 8 percent came into effect on March 10. With that, a total of about Rs 4,100 crore was released into the system.

So how will this impact you as an investor. Firstly These measures, by the Minister and the RBI, will leave banks and financial institutions with no alternative but to lower lending and deposit rates. This will mean a revision in the interest rates on fixed deposits by various banks. Financial and Housing Finance institutions will also contemplate a lowering in their rates. So where on one hand an investor will benefit from the lower interest outgo, he will also have to suffer the a fall in the rate of return of fixed income yielding instruments like FD’s etc.

Normally with a rate cut the equity markets tend to bounce up. So may be one will see a rise in the index as more money will be diverted from the fixed income instruments to the equity market. But the biggest benefit will accrue to bond funds. The relationship between the interest rates and bonds is inverse. So if interest rates come down, the bond yields go up. Therefore investors would benefit in concentrating on some blue chip bond funds. We have highlighted some of these funds in the table below and would advise investors to consider entry into the same.

Aru Srivastava

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