New Delhi: Amid concerns over devaluation of Chinese yuan hitting Indian exports and investments, Finance Secretary Rajiv Mehrishi said the government will come out with a "carefully thought-out response" to deal with the situation.
In an interview to PTI, Mehrishi pushed for RBI cutting interest rate to encourage manufacturing and boost exports, arguing risks are not much as inflation is low.
China last week devalued the yuan to combat the deepest economic slowdown since 1990 amid falling exports. The move has made Indian exports to the communist country more uncompetitive and is likely to further widen the bilateral trade gap.
"Where we are competing with China, our exports are likely to be adversely affected (following yuan devaluation). If China becomes a more attractive investment destination, then there would be an outflow of money from here. There will be a reverse flow.
"So, basically devaluation of yuan is something which has to be taken note of by us and there has to be a response in terms of policy, both from the government and RBI. We are still working at it. There are a whole host of areas that need attention. Maybe, our export policy," he said.
China, which is one of the top five destinations for Indian exports, may see contraction in demand for Indian goods due to the devaluation, making it difficult to maintain the pace of monthly outward shipment at USD 22 billion.
Indian exports to China declined 19.5 per cent yoy to USD 11.9 billion in 2014-15.
Mehrishi said "a carefully thought-out response" will be made to help exports and investments, refusing to elaborate.
"We have to make sure there is more investment, that the issues of the steel sector are attended to... And if you are willing to become competitive in exports, that is the idea, whatever is required (will be done)," he said.
Cost of production of steel in India was nearly 1.4 times the figure in other parts of the world and yuan devaluation will make it even more uncompetitive in comparison with Chinese products.
Rupee has fallen to a 2-year low of sub-65 to US dollar in response to the steep depreciation in the yuan, but Mehrishi indicated that there was no cause for panic.
"I think the rupee will find its own value. In my opinion, there is no need for any intervention at this stage," he said, adding that there is nothing to be alarmed about as of now.
Mehrishi said there was some devaluation in the rupee, but it has stabilised.
"I don't think there is panic in the currency market at all. Economy is doing well, IIP is doing well, we are well placed to handle this," he said, adding that the Finance Ministry is comfortable with whatever rate the market determines.
Mehrishi said: "If you let your currency float, it is a issue of demand and supply ultimately. Market is the best judge. We don't control exchange rate any more, it is market determined. So, rupee finds its own value in the markets. There is no extraordinary development in the rupee in the last couple of days."
Talking about monetary policy, he said there is a case for a rate cut by RBI. When globally rates are almost negligible, having high rates may end up attracting hot money, which will "desert quickly" on developments such as devaluation of the yuan.
He said with government bond rate being 7.8-7.9 per cent, there would be a natural tendency for idle money sitting in Europe, America and Japan to be parked here.
"If there is a lower rate, it would help in growth of projects... The fact is our exports are declining. So, there is a likely positive impact of a lower rate. Inflation is low, therefore, risk is also not too much. These are the advantages, but whether it should be done? The best people to judge is the central bank. And the decision which they take in their wisdom, their best decision," Mehrishi said.
"They (interest rate) are near zero in Japan, the US. If there is any surplus money that you have in Europe and America and you want to have a real rate of return, India is the best place to park and hedge also," Mehrishi said.
Both WPI and retail inflation have fallen to record lows. While WPI is at (-)4.05 per cent, CPI came in at 3.78 per cent in July.
RBI Governor Raghuram Rajan after the monetary policy announcement on August 4 had said the central bank may cut interest rate even out of the policy cycle depending on how macroeconomic indicators play out. So far this year, RBI has cut rates by 0.75 per cent.
