The economy is reeling under the high inflation rate of over 8 per cent. The main cause for this condition is not endogenous, but lies outside the economic system. The rising oil prices push the domestic prices further up. So far, the governments, both at the Centre and the States, have been doing tight-rope walking. The apex bank, on its part, did not act earlier to pump out excess quantum of money.

The recent cut in duty on oil failed to yield the desired result. There is greater demand for funds domestically. The commercial banks are conservative. But one cannot blame the banks entirely. Nature also played its part.

The stock market is highly volatile. The RBI has raised the CRR from 4.4 per cent to 5 per cent. It is said that this move will absorb the excess liquidity to the tune of Rs 8,000 crore.

Earlier, there was a suggestion to utilise the burgeoning foreign exchange earnings through public sector banks. This shows the domestic demand for investment. The RBI follows a biannual review of monetary and credit policy. During reforms and in times of distress, a mid-course correction is required. It should not end up with the manipulation of dollar alone.

In this context, the RBI ought to have approached this situation differently. It could have done something with the bank rate. At least, it must desist from the low interest rate regime.

The action taken should have a direct, immediate impact on the financial market. The rise in CRR has its own inherent time lag, with a possibly delayed effect on the economy. The RBI's action hovers around the legal monetary framework. It is well known that there are many undercurrents and crosscurrents requiring potential action.

D. Srinivasan

Tiruchirappalli

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