Apart from cutting the benchmark repo rate by 25 basis points for the second time in a row, the Reserve Bank of India (RBI) on Thursday also announced measures to increase liquidity to ensure that the effect of the rate cut actually makes it to the real economy.
Higher liquidity chasing the same volume of debt pulls down market interest rates. This, in turn, increases the value of bonds issued at older rates, particularly long-dated bonds. Savvy investors who bought into long-dated bonds and long-duration debt funds have already pocketed decent levels of gains, with the yields in the market already having factored in a rate cut.
