Policy easing doesn't fuel outflows, hit rupee: MPC

Members signal need to aid growth, point out rate differentials don't fuel outflows

- Gopika Gopakumar

Monetary policy committee (MPC) members acknowledged the need to give growth the much-needed impetus, while assuaging concerns about the impact of policy action on foreign exchange outflows and the rupee, minutes of the panel's latest meeting showed.

The six-member rate-setting committee had announced a 25 basis points cut in repo rate to 6.25% earlier this month, the first rate reduction in five years.

According to the minutes, MPC member and Reserve Bank of India executive director Rajiv Ranjan said the need to cut rates should not be hindered by concerns of capital outflows due to interest rate differentials.

"Capital flows to India are driven more by its distinctive growth story rather than interest rate differentials, a phenomenon observed for many EMEs (emerging market economies). Reviving growth and building on resilience is an imperative, especially at a country-specific level. Interest rate defence of exchange rate could turn out to be counter-productive, especially during periods of global tide towards outflows driven by factors that do not differentiate across nations such as the risk-taking propensity of global investors or uncertainty driving reserve currency strength," said Ranjan.

The other MPC member Saugata Bhattacharya also allayed doubts about whether policy easing could result in rupee depreciation. Quoting a study, Bhattacharya said that if rupee depreciates by 5%, consumer price "inflation could be higher by around 35 bps" and GDP growth "could edge up by 25 bps through short-term stimulation of exports".