* Rupee slips on report commerce ministry backs weaker rupee
* Export lobby pushing for boost to competitiveness
* ‘No plan to change policy’: finance ministry
* Policymaker: We don't target levels, just smooth volatility

India's finance ministry swatted down a media report on Thursday of a possible devaluation of the rupee, dismissing lobbying by struggling exporters seeking a competitive boost from a cheaper currency.

The rupee weakened 0.28 percent to 67.0750 to the dollar after a television channel CNBC-TV18 reported that the commerce ministry would propose a devaluation, before steadying after the central bank stepped in to prevent a sharp fall.

At 0900 GMT, it traded off the day's lows at 67.00, weaker than Wednesday's close of 66.8875/8975.

‘The value of rupee is determined by the market and there is no plan to change policy,’ the finance ministry's economic affairs secretary, Shaktikanta Das, told reporters. ‘Reports that the government wants to devalue the rupee are false.’

A policymaker stressed that the Reserve Bank of India did not set the rupee's exchange rate and is ‘there only to contain volatility.

‘It will always allow the market to decide the rupee's right price,’ this person said. ‘The RBI doesn't believe in devaluing the currency. It also doesn't make sense because our imports are more than our exports.’

LOBBYING BY EXPORTERS

In July, India's merchandise exports fell 6.8 percent from a year earlier, according to government data showing weak global demand. Imports fell faster, by 19 percent, on low oil prices. India ran a $7.8 billion monthly trade deficit.

The Federation of Indian Export Organisations (FIEO), a business group, confirmed it had discussed the rupee's exchange rate and interest rates with the commerce ministry.

‘A rupee devaluation is required,’ its director-general Ajai Sahai said. ‘Indian exporters are outpriced in the global market.’

One commerce ministry official said the department favoured the demands of exporters and might raise the matter with the finance ministry before taking it to the cabinet. However, a senior finance ministry official said no proposal had been made to devalue the rupee.

Lobbying of ‘nodal’ ministries such as commerce is common in New Delhi but the finance ministry, which under Arun Jaitley is the most powerful department outside Prime Minister Narendra Modi's office, often gives it short shrift.

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 exchange rates.

MINISTER'S TWEET

After Thursday's TV report, Commerce Minister Nirmala Sitharaman tweeted that she had not told a reporter the government was discussing a devaluation. But her comments stopped short of denying the ministry was weighing such a proposal.

Sitharaman, who does not hold cabinet rank, recently called on the RBI to cut interest rates by two percentage points.

Those remarks came at a sensitive time, as the RBI has a new chief, Urjit Patel, and a six-member Monetary Policy Committee being created to set interest rates has yet to be fully staffed up.

Three of the MPC's members would be ‘external’ candidates. A replacement for Patel as deputy governor has still to be chosen, and it is conceivable that he could find himself heading a panel with dovish leanings.

Most economists, however, view the RBI's shift to Western-style inflation targeting under former Governor Raghuram Rajan, backed by setting a long-term central inflation target of 4 percent, as well entrenched.

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

A drop in annual inflation to a five-month low of 5.05 percent - in the RBI's comfort zone - has opened the door to a possible rate cut next month or in December, say economists.