Time for rate cut; response to yuan drop soon: Fin Secy

India's rates are out of sync with the rest of the world, and this will end up attracting more hot money than is ideal, feels Finance Secretary Rajeev Mehrishi.“In a global environment where rates are almost negligible, 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,” he said in an interview to CNBC-TV18.He said with India’s government bonds rate being 7.8-7.9 percent, there would be a natural tendency for idle money sitting in Europe, America and Japan to be parked here.He said having a rate which was attractive even after accounting for hedging costs was not good.To a question on whether the government felt the time was right for a rate cut, Mehrishi said: "It will certainly help; it will help credit flows, it will help exports, it will help industry. If money has to flow out, it is better that it flows out over a period of time rather than a sudden reversal.” He says China's devaluation of its currency yuan has been taken note of and a “carefully thought out” response was in the offing."You will see a response; everything has to be thought out carefully," he said, adding the response would have to come jointly from the Reserve Bank of India as well as the government.The rupee on Wednesday fell to a two-year low, in response to the steep depreciation in the yuan, but Mehrishi indicated there was no cause for panic."I think the rupee will find its own value. I don't think an active intervention by anybody in the forex market is called for at this stage," he said.On the pleas for help from the industry for higher import duties to protect against dumping by Chinese companies, Mehrishi said the approach has to be a “balanced” one.Specifically on steel, he said the problem was that the cost of production of steel in India was nearly 1.4 times that in other parts of the world."If the cost of production is 1.4 times higher than anywhere else, then higher import duty or safeguard duty will not be the answer," he said."It calls for a balanced approach, which means you take the steps that are required to protect your industry through measures like safeguard duty, anti-dumping duty if it comes to that. But we also need to see how we can make our domestic cost of production lot more reasonable," he said, adding that gap between per tonne cost of production between different manufacturers in India is quite wide in India._PAGEBREAK_ Below is the transcript of Rajiv Mehrishi's interview with Shereen Bhan on CNBC-TV18.

Q: Let me start by asking you about what the north block view is about the out-of-turn policy cut is concerned. The mood in north block seems to be that given the inflation data that has come in yesterday at an 8-month low, the timing is perfect, in fact the finance minister in his conversation with CNBC-TV18 a few days ago said that the environment is very favourable for a rate cut. Do you see the need or the desire that north block is pushing for a rate cut out-of-turn ahead of the policy?A: As you know, I have made it a consistent policy not to comment on the monetary policy actions of the Reserve Bank of India (RBI). So 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 USA, 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.Q: Are we? Is that a concern at this point in time that we are seeing flows of hot money into the economy?A: No -- it is the issue that needs to be looked into because it is a global environment where interest rates are virtually nil and our G-sec ratio, yield rates are still 7.8-7.9 percent so naturally there would be propensity for idle money sitting in Europe or Japan or USA to get parked in the -- there would be a propensity though RBI controls that with limits on foreign investments in both the corporate bond and the treasury bond but still being out of sync with the world somehow doesn't sound right.Q: You believe that we are out of sync with the world at this point in time?A: I think so yes.Q: So we understand -- this is of course source based information -- that north block is going to push, nudge the RBI to try and act on rates perhaps ahead of the credit policy, would that be the choice, the view of the Finance Ministry?A: No, I stoutly deny that north block pushes RBI ever. We never pushed them.Q: Let me not use the word push but you are making a vociferous case for an out of turn rate cut?A: It is interesting that if you look at the monetary policy framework of UK for example, government's point of view is presented before the monetary policy committee (MPC) by a non-voting government member. So I think in my opinion though we don't have that system, there should be -- and I hope that when the MPC comes this happens -- a system whereby government can state its point of view and put it in public domain at an appropriate time. So government's point of view is known and then RBI should decide on merit taking into account all the stakeholder's views including the government's view.Q: I will come to the MPC and the composition of the monetary policy committee in a bit, but if we had an MPC that existed at this point in time, what would the government view be on a rate cut in an out-of-turn rate cut?A: It is a hypothetical question.Q: What would the north block view be?A: Difficult to answer hypothetically. I think I have answered it.Q: So, you believe that the time is ripe at this point in time for a rate cut?A: It will certainly help. 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.Q: Let me move away from rates and talk to you about the other issue that you mentioned and that is the devaluation as far as the yuan is concerned. Yesterday, the Chief Economic Advisor (CEA), Arvind Subramanian said that policy makers around the world will need to take note and even in India, policies will have to be tweaked accordingly. What should that mean? How should we interpret that statement? What can we expect in terms of policy action?A: I do not know whether my job is to interpret Chief Economic Advisor’s statements, but yes, certainly, the development in China of yuan having devalued 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.Q: So, what would that mean? What kind of policy response are we talking about? And at this point in time, for instance, in specific measures to protect the steel industry – we have already seen a 2.5 percent imposition as far as the import duty is concerned – there has been a lot of talk on the possibility of safeguard duties being imposed. Is that the kind of action that you are talking about? What else can we expect?A: That could be one part, but there are other policy issues, macroeconomic issues that we need to get done. So, that we can discuss at length, but it is difficult to give a one line or two line answer to a larger question of what needs to be done on policy issue. So, you will see some response unfolding from the government side over the next few days and weeks because everything has to be thought out carefully and thoughtfully. So, it is very difficult to give on the spot response of what the exact policy response should be which is why perhaps, CEA also, just said yesterday that we need to take a note of it.Q: So, you are saying that we will over the next few days see policy response from the Indian government to combat what we are seeing happen in China as far as the devaluation is concerned?A: I am saying that Indian government, and other concerned institutions should respond, yes._PAGEBREAK_Q: That is something that you are looking at but let us talk about the currency and the impact as far as the yuan devaluation is concerned on the Indian currency as well. We have been an outperformer so far in comparison to other emerging market currencies year-to-date (YTD), now down to almost 2 year low, yesterday for the rupee, what is the outlook as far as the currency is concerned and what would you be comfortable with? I know that the government says we don't direct the band as far as the rupee is concerned but what level are you comfortable with?A: My response is only exactly what you said that government doesn't control 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.Q: So you are saying that active intervention is not called for at this stage, when would you see the need for active intervention?A: It depends on so many circumstances. 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.Q: So at 64.77-65/USD you are okay with that?A: I am talking in general principles, I cannot give you a figure because it would be wrong on anybody's part to give you a figure so there is no absolute comfort or discomfort with any figure. What one is comfortable with is that you have an issue where exports are not adversely affected, where your own inflation rates are in control, where your prediction cost don't go awry. So we have to have -- and 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.Q: Let me now talk to you about some of the other issues that you are dealing with and on the disinvestment front, Coal India an additional 10 percent stake sale has been announced by the government, merchant bankers have to be appointed by September 2, Indian Oil Corporation (IOC) merchant bankers have already been appointed -- do you believe that given the global volatility as far as equity markets are concerned, the need of the hour is to push the accelerator and get these disinvestments done as early as possible perhaps ahead of the US Fed meeting?A: No, disinvestment is an announced policy of the government -- there is a figure given in the Budget and I think that the disinvestment department is quite confident of reaching that figure.Q: Except the Secretary said that it is very ambitious, it is very challenging and so far you have only done two small issues and Coal India perhaps will be the big one?A: We still have eight or seven months left but it is nice to have challenging targets otherwise nobody would climb the Everest.Q: Are you going to be pushing ahead on the disinvestment ahead as I said of further uncertainty that should be caused on account of the Fed for instance?A: So what impact a Fed hike will have on prices here and whether that will discourage us from selling is again something that the impact of Fed what it will be on India is very difficult to predict. So we will have to respond when the impact or the effect takes place. So I think if the impact is not too serious and if everything is normal and stock market performs well, there is no reason why we should not be able to -- if not actually hit the target at least come extremely close to it._PAGEBREAK_Q: Let us talk about the non-performing loans (NPL) situation in the banking sector, do you think it is a big concern?A: It is an extremely serious issue because banks are stressed, they are finding it difficult to lend, borrowers are finding it difficult to borrow at the kind of rates that are being offered, so it is a difficult situation for the banks and in banks apart from recapitalisation, more needs to be done. So, raising more capital by way of disinvestment is one, the other thing government is already doing which is getting better management, more professional management, perhaps there may be a need also to see whether we need some consolidation, whether we need any fire sale.Other day the Vice-Chairman of National Institution for Transforming India (NITI) Aayog spoke about a bad bank, that also we should look at. So balance sheets of the banks have to be cleared and just equity infusion by recapitalisation by the government may not be sufficient to clean up the equity balance sheet.Q: So, is the government actively looking at fire sales, actively looking at consolidating within the banking space?A: The alternative has been mooted, so it will be examined and the fact that government has decided to recap should enable banks -- because ultimately it is the bank's decision -- to look at the fire sale option because otherwise they would have found it difficult to take a hit on their equity. So, it should be possible, so it is something again which will unfold in the next few weeks, so there is no yes or no decision as yet on this.Q: You are saying that a decision on possible consolidation could emerge in the next few weeks?A: No, you asked me on fire sales so I said that banks have to decide and they should be able to take a view on that in the coming weeks or months on whether they would like to -- with this recap, they are in a position to do some fire sales to clean up their balance sheet because they have greater equity infusion. So it is again as I said, three, four, five steps have to be taken in a balanced fashion in parallel. So whether it is disinvestment, whether its recapitalisation, whether it is fire sales, all this has to be looked at in a balanced and proper fashion and done in parts in respect of all. There is no single solution to this problem.Q: Let me talk to you about institutional reforms and let me start by asking you about what has become the big controversy as far as the MPC is concerned. Where do things currently stand as far as the composition of the committee? The RBI governor says that there was a consensus that was arrived at between north block and the central bank on the composition, the Finance Minister, in his conversation with us said that it is not a decision that has been taken yet. Where do things currently stand? Is there an agreement with the RBI on the composition?A: There is a broad agreement and the t's have to be crossed and the i's have to be dotted but the MPC is actually the other side of the Public Debt Management Agency (PDMA) because most people did not I think catch on to the idea that basically, MPC is the monetary policy function of the RBI where they would like to sometimes keep the inflation rates high and the public debt management function of the RBI which would like to keep the cost of borrowing from the government low. There is an inherent conflict of interest.  So, basically, the two issues need to be seen together, settled together and we are making steady progress on both and if we are lucky and things go right, then hopefully, there should be some movement in the winter session of parliament.Q: On both, PDMA as well as the MPC?A: I am hoping to and I am working towards that.Q: On the composition, and again, this has been the controversy that captured headlines on whether the Governor should have veto or not have veto and the Governor on his part has categorically stated that it is fine for a there to be a committee and for the committee to take that decision and not just depend on the Governor’s decision. Three plus three plus casting vote, is that the current agreement between north block and central bank?A: This is not something that can be discussed before it is placed in parliament. This is parliaments prerogative and I am a civil servant and I do not discuss these things in public till they go to cabinet and it gets placed before parliament. I am not keen to commit breach of privilege, so once we place it in parliament, you will know the structure. So, I am not going to tell you what the structure is likely to be.Q: Casting vote or veto?A: I cannot tell you because it is really parliament's prerogative to decide these things.Q: So, what should we expect now in terms of the forward movement or the past as far as both the PDMA and the MPC -- you said that you hope to take both these matters to parliament in the winter session because the RBI act will need to be amended at least as far as the MPC is concerned.A: Yes, as I said, I am working towards it and hopefully if we have an all round agreement, we will be there, so we are working towards this target which is also incidentally challenging.Q: Speaking of reforms at this point in time in terms of expenditure management and expenditure control we have seen further movement and of course it has been helped by the fact that globally oil prices have come off quite sharply. Fiscal deficit target do you believe you will be able to better that at the end of the year?A: Question is should I try to better it? I don't think we should try to better it. The Finance Minister announced in the Budget speech that he would like to see greater public investment as an impetus to further growth. So, there is no reason for us to try to get a better fiscal deficit number for the sake of getting it. So, we should step up on public expenditure. The indirect tax revenues are robust. So, there is no need for us at this point in time to look at a cut in expenditure. Public investment is required, so expenditure is required.The one thing I did not talk about is in Q1 even capital expenditure for the government has been higher than last year. So, I think in my own opinion we should be just happy to hit the target of 3.9 percent. There is no need whatsoever to try to better that.Q: Are you likely to get an extension?A: I don't want to talk about myself but it is my general belief that when a persons time comes he must go. It is also my general belief that the younger lot are much better by definition than people who are retiring  or old. So, I think in an ideal world that I would dream of, government would not make you secretary if you are over 50. So, we need younger people in the system. That is my general belief in what I personally believe in. However my beliefs are my beliefs.