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Finance Ministry makes case for rate cut, says hot money can ‘desert’

Thursday, 13 August,New Delhi: Making a case for rate cut by the RBI, a senior Finance Ministry official on Thursday cautioned that hot money can “desert” the country in response to events like devaluation of Chinese currency yuan which can impact stock markets as well as exports.

“I would not like to say whether the rate should be cut or not cut, but I would like to nonetheless say that in a global environment where rates are almost negligible in the US, Europe and Japan, having a rate here, which is attractive, may end up attracting hot money which will desert us if developments like the devaluation of Yuan take place. So basically what we need to see also apart from anything else is whether we are unwittingly perhaps attracting money which is called hot money which can desert us,” Finance Secretary Rajiv Mehrishi told private news channel CNBC TV18.

India is attracting foreign institutional investors as interest rates here are high, but there are fears that they may withdraw if the US Federal Reserve raises interest rate.

Although the RBI reduced the key policy rate by 75 basis points to 7.25% in 2015 so far, the industry feels it is very high and should be brought down further in tandem with the low interest rate regime.

Mehrishi said the devaluation of yuan twice in two days is “something that will have to be taken note of”.

“It will certainly affect our exports in markets where we compete with China. And as you can see, the stock market is already, perhaps a little nervous. So, we have to take note and respond and the response will have to come institutionally both from the RBI and the government,” the Secretary said.

When asked whether the time is ripe for a rate cut, he said it would promote credit growth.

“It will help credit flows, it would help industry, it would help our exports. If any money is to flow out, then it is better that it flows out slowly over time rather than have a sudden sort of reversal of inflows.

“So, being more or less in sync or at least not having a rate, which is hedging cost plus a real rate of return, would I think be quite helpful overall,” he said.

On rupee, he said the government does not control the exchange rate.

“So I think the rupee will find its own value in the market. So market will determine its value. Market has reacted somewhat yesterday and we would see how this performs today but I don’t think that very active intervention by anybody in the forex market is called for at this stage,” Mehrishi said.

He also said there can be no “absolute value” to rupee.

“Basically it depends on where other currencies are, what your export situation is, what your own domestic inflation rates are, so there are so many factors and these are all moving targets,” he added.

The rupee today breached 65 level against the dollar.

“…I think the market finds you a rate like that on its own more or less. In an extreme situation, there may be a need for a policy intervention etc but I don’t think that in normal circumstances that is needed ever,” he said.