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Indranil Sengupta, Chief Economist, DSP ML, said India would not see monetary easing, even if there is a rate cut.

He feels the rupee will appreciate from current levels. "It will head towards 38 per dollar by April."

DSP ML sees RBI hiking CRR by April, he added.

Excerpts from CNBC-TV18’s exclusive interview with Indranil Sengupta:

Q: You told us that you are in the pro-rate cut camp. If there isn't a rate cut, do you think we are going to see severe reverses in any of the markets - equities and bonds?

A: I do not think so. A 25 bps rate cut is essentially going to be, from the perspective of exchange rate management, because the differential between the US and us is clearly widening.

At the same time, it is necessary to distinguish between the meaning of a rate cut and monetary easing. I do not think they are going to see monetary easing. Even if RBI cuts rates, they are going to keep liquidity tight for the time being. Money supply is 22%. So, one should not read too much into a rate cut, except from the angle of exchange rates.

Q: Where would you say the 10-year bond is headed from here on?

A: The momentum is in favour of the 10-year right now. Inflation is not likely to go much beyond 4%. Probably, RBI is going to be hawkish to soft at the same time.

The medium-term risks are against the 10-year. You have money supply that is high, RBI will tighten at some stage, and the winter crop is open to question. So, there are inflationary risks alongside.

Right now, there isn't anything on the horizon that could immediately stop this rally. That is unless RBI comes in with higher doses of MSS, which is also a possibility, given the fact that they bought USD 10 billion since December.

Q: What is your take on the rupee, considering that even USD 6 billion or thereabouts have been pulled out by FIIs? Do you think the liquidity problem will persist from there or are you seeing pressures of rupee depreciation?

A: The rupee will appreciate a bit more because the dollar will fall a bit more. On the other hand, the rupee negatives are clearly mounting. The trade balance is clearly rising and exports are hit. You have also seen a higher oil bill. At the same time, for the rupee to depreciate, the dollar has to stop falling. Until there is some evidence that the Fed is done, the dollar is not going to re-trench meaningfully from current levels.

Q: Can you make a case for anything that RBI may do with CRR, not in this meeting but maybe in the next three-six months?

A: RBI should raise CRR going forward, because the 22% growth in money supply is clearly an inflationary risk. Hiking CRR now would be counterproductive. It would probably create liquidity conditions that would be far too tight, because we are in the midst of a busy season. In April, when liquidity eases, one could expect a CRR hike. This is going to be an unconventional Monetary Policy in my view, where there is an imperative to cut rates from an exchange rate perspective and to tighten liquidity from a domestic inflationary perspective. That is why the polls are so divided, because the situation is tricky.

Q: Where does all this leave the rupee? What is your rupee-dollar target for April?

A: We are looking at the dollar depreciating to 1.57 to the euro, going forward, because the greenback is beginning to become a negative carry. If that happens, the rupee would see 38 levels before it peaks off this year.

Source: Moneycontrol.com