Problem overlapping 2 round images : square corners instead of round ones

In the code below, I am trying to add some kind of halo blurred effect to a rounded image.

For this, I have created in Photoshop a blurry background -> "blurredBackgroundImage", which gets drawn before the initial image (an .ico file). (the blurred picture is bigger in size than the initial image => halo effect around the initial picture). The problem arises after having overlapped the images, since now the initial image gets truncated somehow, i.d it is not perfectly round. I would appreciate any help! 

private void DrawHalo(ToolStripItemImageRenderEventArgs e, Rectangle rc)
        {
            Image initialImage = e.Image;

            var rcBm = new Rectangle(7, 2, rc.Width, rc.Height);
            rcBm.Inflate(3, 3);

            var blurredBackgroundImage = Properties.Resources.preferences_blurredBackground;           
	    e.Graphics.SmoothingMode = SmoothingMode.AntiAlias;
            e.Graphics.DrawImage(blurredBackgroundImage, rcBm);            
            e.Graphics.DrawImage(initialImage, rc);
        }