Expect a 50 bps CRR hike soon: ING Vysya Mutual Fund

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

K Ramanathan, Head-Fixed Income, ING Vysya Mutual Fund, said he expects a 50 basis CRR hike in the next couple of months. ING Vysya is recommending investments in short-term funds and not gilt funds to its investors, he added.

Excerpts from CNBC-TV18's exclusive interview with K Ramanathan:

Q: What kind of an action are you expecting from RBI on Friday?

A: There is a market segment that expects a CRR hike of 50 basis points on Friday, but I don't fall in that segment. Despite the inflow of Rs 20,000 crore on Monday, liquidity is evenly balanced. If you see the today's numbers, you have an Rs 8,000 crore auction on Friday, the outflow of which will happen on Monday, and we expect another Rs 6,000-10,000 crore MSS auction to be announced by RBI tomorrow, the outflow of which will happen on Wednesday next.

If one adds up these numbers, combined with the negative liquidity situation today, Rs 20,000 crore will be easily sucked out. There may be possibility that within a span of two-to-three days next week the CBLO (Collateralised Borrowing and Lending Obligation) could crash because of liquidity mismatches or liquidity coming into the system and not being drained out immediately. In the first week of June, you have another auction of Rs 9,000 crore and could also come out with another Rs 6,000 crore long-bond auction. So, in the first week of June you could see Rs 15,000 crore drained out, which could bring liquidity back in shape as RBI expects.

Q: There is a fear of the DLF IPO, ICICI Bank public issue and also others issues bringing in money. Do you think, within a month or two months, there could be a chance of a CRR hike if not immediately?

A: I expect that. I see a 50 basis points hike in CRR in the next couple of months by RBI. The main reason being the DLF IPO and ICICI ADS, which will bring in huge dollar inflows and that needs to be sterilized. That's one of the reasons why RBI could look at hiking CRR In the next couple of months.

Q: Assuming such a hike does come in, for the next quarter what kind of a band are you giving the 10-year bond? What would be your advice to people looking to invest in fixed income mutual funds?

A: As far as the investments in fixed income mutual funds are concerned, we are focusing predominantly on short-term funds that are liquid, liquid-plus and fixed maturity plans. We are still not recommending income and gilt funds as we are not positive on the gilt market.

We could see inflation coming off which should be fundamentally positive but we also expect a SLR cut in the second half that technically would result in a weak bond market. We feel the situation is quite balanced and see a range of 8-8.25% for the 10-year in the next two-to-three months.

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