Liquidity has come down, CRR hike likely in Jan: CRISIL Fund Services

We have seen bond yields come off very sharply in trades today. Do you somewhere believe that sentiment has turned after statements that have come out from Delhi yesterday?

In the last week, 10 days time, there has been a sharp run up on the yields across maturities which I had said that would be kind of a knee jerk reaction and we would need to have yields at reasonably lower levels than what were prevailing. So what is happening today is that it has been felt in various quarters that the yields had run up and hence certain comments have come in and hence the markets have come off.

We however believe that the liquidity situation in the market has temporarily come down. If you go back to one month back, liquidity was in the range of around 1 lakh crores in the market but today it is around 40,000 crores, primarily because of advance tax outflows as well as certain amount of pickup in bank credit because of short term loans going out. So that has come down to around 40,000 crores. But we believe that come January, lot of the money which the government has borrowed in December through Central as well as state governments would come back into the market through expenses, investments and salary payments. Hence the liquidity levels will further go up. So I do not see too much of upside in terms of yields moving up from hereon.

Would you somewhere say that all this scare that we saw over the last three four days of a cash reserve ratio hike imminent and almost around the corner has begun to go away and actually the fixed income markets are coming around to the belief that maybe a hike in the cash reserve ratio will be seen maybe by the first or the second week of January or even maybe only when the RBI reviews its monetary policy?

Our viewpoint is yes, there is definitely a chance for the CRR to move up from the current levels’ marginal hike. At the same time, the markets had actually factored in reasonably large quantum of CRR hike and that to happen in a very short time frame. We do believe that that CRR hike would happen but again after reviewing the liquidity situation in January because CRR is a medium to actually draw out liquidity from the markets and today if you look at one-month time frame, liquidity has already come down from one lakh crores to 40,000 crores. So I would believe that RBI would again review the situation in January and then take a decision on the CRR hike. We however believe that marginal hike is on the cards maybe in January.

The markets have somewhere been extremely scared off by the inflation factor that inflation is expected to go maybe all the way to seven per cent by the end of March next year. If you just adjust the inflation numbers and take away food prices from that, the inflation number really does not look so worrying. You have voices coming out of Delhi saying that food price rise is not something that can be tackled with monetary policy and that that is really something that needs to be addressed through fixing the distribution system and fixing supply side issues. Somewhere then, do you not believe that there is scope for yields to come off current levels and that maybe the market should not be reacting so strongly to the inflation numbers?

I completely agree. A large part of the inflation which is skyrocketing today is due to supply side issues and the world over economies will tell you that hiking interest rates is not the solution to tackle supply side inflation; it can tackle demand side inflation. Supply side inflation can be tackled only by increased supply and hike in interest rates actually suppresses investments which actually go to enhance supplies. So that is a very valid point that you make and I could not agree with you more.

At the same time if you look at the current yields, they look to be actually going up beyond a certain comfort level and while I do believe that there are still situations or environmental issues which will keep yields at a reasonably high level, the current levels - at least till the 10-year GSEC yesterday at around 7.6 per cent - look to be little higher than what fundamentals demand them to be.