Sandeep Bagla, CIO-Fixed Income, AIG Investments, said RBI would first mop up liquidity from MSS bonds and then perhaps hike CRR by 50 bps.

Excerpts from CNBC-TV18’s exclusive interview with Sandeep Bagla:

Q: Inflation was the spook last week. What are we bracing ourselves for in terms of yields, what are the apt prospects?

A: There are two major factors in the market right now. One is the imminent supply in terms of fresh government bond auctions which is starting just about this week and the inflation numbers that have been increasing because of rising prices which have not been updated for sometime. Typically, we have seen that inflation numbers once they start getting updating they tend to go a long way. So, the market is expecting inflation to edge up to may be 7.2% and remain at about 6% for the next five-six months which is much beyond the comfort zone of RBI. Hence the expectations of any action from RBI could be bond negative and have taken yields up by almost 60-65 basis points.

Q: How much money may have moved out of equity funds into debt funds over the last one-quarter?

A: It is very difficult to say but investors have now turned more towards the longer-term. Investors are scared to commit fresh funds to equities and that money is finding its way into debt schemes of various nature, they could either be liquid or short-term income funds.

Q: There is an expectation that treasury built redemption coupon payments could bring in about Rs 370 billion (Rs 37,000 crore) into the market this month. Could you agree with that figure?

A: There are substantial redemptions slated for this month. But at the same time, RBI is coming out with a lot of MSS (Market Stabilisation Scheme) bonds supply, which is going to wipeout that. There are expectations that they might act on this CRR as well towards the end of the month. So, while the demand will be there, there is supply matching the demand.

Q: Are saying that there have been redemptions on debt funds over the past few months?

A: No, not redemptions. We have seen inflows into debt funds. Of course, March is a peculiar phenomenon every year.

Q: How much can you quantify?

A: I think Rs 30,000-35,000 crore would have gone out in March. But the money is now coming back.

Q: How have yields moved over the past one-quarter?

A: On the one-year corporate bonds, they had started from 9%, they went to 10% and now they are back to sub-9% levels. I think because of the liquidity coming back in the system, corporate bond short-term yields are flat in three-months time. That provided a very good investment opportunity. But the fear of government bond auctions have taken up the yields to almost 60-65 basis points, from a low of 7.35% last quarter to almost 8% now.

Q: On the monetary side, you are expecting action from the RBI. Give us an idea of both the instruments-CRR and interest rate.

A: It is a difficult call because RBI has twin objectives of managing inflation and making the situation conducive for growth.

As we know, growth is slowing down and it is a matter of economic priority. But as the liquidity is surplus, RBI will first take out liquidity from MSS bonds and then perhaps hike CRR by 50-bps.