RBI cuts CRR: How will the bond market react?

The Reserve Bank of India (RBI) on Friday cut the cash reserve ratio for banks by 75 basis points in order to ease tight liquidity in the banking system.

The RBI cut the cash reserve ratio, the share of deposits banks must hold with the central bank, to 4.75%, effective Saturday, less than a week ahead of its mid-quarter policy review on March 15.

A CNBC-TV18 poll of economist had guessed that RBI would cut rates by 50 bps. 

A Prasanna, economist, ICICI Securities says, "This is surprising. After this cut, no change is expected in the RBI's policy review on Thursday. The cut should by and large take care of the liquidity deficit, and I don't expect the overnight cash rates to get into double digits after the tax outflows happen.

Samiran Chakrabarty, head of research, Standard Chartered Bank expects a knee-jerk reaction to this move. He also rules out any possibility of rate action in the credit policy next week.

Today, 10-year went up sharply to 8.28%, therefore, a worried system was bidding up the bond yields and bidding down the bond prices. This is clearly going to bring bond yields down, however, not more than 10 basis points immediately says S Raman, CMD of Canara Bank.

Meanwhile Prasanna expects the 10-year yield to recover some lost ground, and come back to 8.25% on Monday.