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The Reserve Bank of India (RBI) cut its key rates by 50 basis points late on Wednesday. "With this rate cut we feel that RBI is almost near the end of the rate cut cycle," analysts Indranil Pan and Kaushik Das said.
Despite the rate cuts, Kotak expects economic growth to slow to 6.5 per cent in fiscal year 2008/09 and 5.5 per cent in 2009/10, mainly due to a sharp fall in investment demand.
The bank said the rate actions will help reduce yields of only shorter tenor bonds as longer tenor bond yields are unlikely to fall significantly due to fresh supplies.
Fresh federal bonds worth around 120 billion rupees will enter the market each week for the rest of fiscal 2008/09, accompanied by large state government issuances.
Kotak sees the broad range for the 10-year government bond at 5.90-7.0 per cent in 2009/10 and said the spread of the top-rated 5-year corporate bond over the 5-year federal bond is unlikely to shrink significantly from the current 250-300 basis points.
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