Dhawal Dalal, Fund Manger, DSP Merrill Lynch, feels the rupee could appreciate to 30.50 to rein in inflation. He told CNBC-TV18 that market participants feel RBI will probably hike CRR to rein in inflation, he added.

Excerpts from CNBC-TV18’s exclusive interview with Dhawal Dalal:

Q: What is the kind of sentiment that you are detecting ahead of the inflation and the government borrowing programme, that is anticipated to go higher than originally envisaged?

A: Currently, the sentiment is a little subdued, given the fact that inflation has suddenly spurted it’s head up and is likely to remain above 6% for quite sometime. At the same time, the new borrowing programme is slightly skewed and heavy towards the first 2-3 months.

The market is taking a view that the government is likely to make sure that there is only sufficient liquidity and will issue more Market Stabilisation Scheme (MSS) bonds as and when required, to make sure that inflation remains under control. So, in a nutshell, we expect yields to remain slightly elevated and that should keep the bond market sentiment a bit subdued.

Q: What is your assessment of what the Reserve Bank of India (RBI) may or may not do in its policy coming up in April? On one hand, you have concerns about slowing growth and inflation concerns also remain. Do you expect any tinkering whatsoever with any of the interest rates?

A: It’s too early to comment on what RBI is going to do in the next credit policy. But the growing sentiment is towards making sure that market participants believe that the RBI will probably hike rate and may be Cash Reserve Ratio (CRR) to make sure that inflation remains under control.

Q: How do you expect the rupee to behave from hereon?

A: Not knowing which way the capital flow will happen, conventional wisdom will suggest that the rupee should appreciate, to make sure that inflation remains under control.

Q: Up to what level would it appreciate?

A: May be 30.50, it’s market driven at the end of the day, but it should remain appreciated.