Hi Jinto,

I would encourage you to think about it in terms of trade-offs. If India wants to keep its external debt from becoming a greater problem, it must stabilize the rupee and increase interest rates. However, if it increases interest rates [substantially], it will likely throw the economy into recession. Theoretically, if it lowered rates to stimulate the economy (very unlikely of course), then it would stimulate the economy (through incremental credit creation), but accelerate the outflow of capital (and accelerate inflation). Doing nothing is also a choice because the US is shifting monetary policy in a global monetary system, so doing nothing means India is easing (relative to the US which is - likely - tightening.