Rupee falls on report of ministry's call for weaker currency; finance ministry denies

By Suvashree Choudhury and Douglas Busvine

MUMBAI/NEW DELHI (Reuters) - The Indian rupee fell abruptly on Thursday after a television channel reported that the commerce ministry will propose a devaluation in the unit to promote dwindling exports, but trimmed losses after a finance ministry denial.

The rupee weakened 0.28 percent to 67.0750 to the dollar before paring losses after the central bank stepped in to prevent a sharp fall. At 0540 GMT, it was trading at 66.9550, lower than Wednesday's close of 66.8875/8975.

The finance ministry denied that the government was discussing a possible devaluation of the rupee, whose floating exchange rate is managed by the Reserve Bank of India.

There was no truth to reports of a rupee devaluation, Shaktikanta Das, economic affairs secretary at the finance ministry was quoted by financial newswire Newsrise, a partner of Reuters, as saying.

Das also said the rupee's value was determined by the market and that there was no plan to change policy on the currency's valuation.

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India's commerce ministry is responsible for trade policy but not for exchange rate policy, which is the domain of the RBI. The central bank does, however, consult with the finance ministry on its exchange rate policy.

Commerce Minister Nirmala Sitharaman also tweeted saying she had not told a reporter the government was discussing a devaluation but did not deny whether the ministry was mulling such a proposal to the government.

Sitharaman, who does not hold cabinet rank and is not widely recognised as a policy authority outside her area of responsibility, recently called on the RBI to cut interest rates by two percentage points.

Those remarks came at a sensitive time, as the RBI is under a new chief, former deputy governor Urjit Patel, and a key new body - a six-member Monetary Policy Committee - has yet to be appointed.

Three of the MPC's members would be "external" candidates. A replacement as deputy governor has yet to be chosen, and it is possible Patel could find himself heading a panel with dovish leanings.

Government officials say the MPC, in which the RBI governor has the casting vote in the event of a tie, should be staffed up in time for Patel's first policy meeting on Oct. 4.

A drop in inflation last month to just over 5 percent - in line with the RBI's near-term target - has opened the door to a possible rate cut next month or in December, say economists.

The Indian rupee has been one of worst performers in Asia so far this year on subdued dollar inflows and persistent RBI intervention to bolster forex reserves.

Thursday's sudden fall in the rupee triggered the central bank to call forex dealers to check on their positions, reported Newsrise agency.

India's export lobby has called loudly for lower interest rates and a weaker rupee to restore the international competitiveness of Asia's third-largest economy, whose growth continues to run at just over 7 percent but has been dented by poor export performance.

However, the RBI has been quite adamant it won't follow such a policy, instead letting market forces decide the currency movement and only intervening to contain any sharp volatility.

(Additional reporting by Manoj Kumar in New Delhi; Editing by Richard Borsuk)