Mohan Shenoi, Treasurer of Kotak Mahindra Bank has a view that there could be limitations to using rupee as a tool to fight inflation because rising rupee is also hurting exports. Speaking to CNBC-TV18, he says that it’s a difficult balancing act for the Government as well as the Reserve Bank of India

Excerpts from the exclusive interview with Mohan Shenoi:

Q: What is the feeling in the dealing rooms with respect to the rupee, is it very strongly believed that the rupee could be used as a tool to fight inflation at all?

A: The general feeling is that there could be limitations to using rupee as a tool to fight inflation, particularly because rising rupee also hurts exports and we have a current account deficit and merchandise deficit at this point in time as well. So it’s a difficult balancing act for the Government as well as the Reserve Bank of India (RBI). So from that perspective, I don’t think rupee will be used in any significant measure to fight inflation.

Q: What advice would you give importers and exporters right now? What kind of levels are you asking importers to come in and buy, what are the levels you are asking exporters to sell?

A: My next 10-15 days' broad range for the rupee is about 40.20 to 40.80 and looking at it from a slightly longer-term perspective, I would say 40 to 41 as the broad range for rupee.

Q: With respect to bond markets, the nasty shock of inflation is being felt in the markets right now, what kind of highs in terms of yields are you looking at - 7.7 on the ten-year at this point in time, the calendar is probably expected in a day or two, so for the next couple of months, what would be your range for the ten-year?

A: I think this inflation number is a one-time number, 5.92% that we saw last Thursday. It was primarily because of edible oil and also because of one-time adjustment in metal prices, which actually caused the hike in inflation rate. Our internal assessment is that as we go along in the next few weeks, we will see inflation numbers around the range of 5.20 to 5.50 which is more or less within market expectation.

Second important factor, which has affected bond market is the liquidity factor. Liquidity has been tight for some time and as we all know Rs 60,000 crore of government surplus and the advance tax collection is also with RBI and once the government spending starts, the liquidity in the market will improve and once liquidity improves and we see a lower headline inflation numbers, I feel bond yields will slowly amber down from their current levels of 7.70 to around 7.50-7.60. My broad range for bonds in the near-term is 7.50 at the lower end and 7.75 at the upper end.