Liquidity crisis and RBI's dilemma

In January 2008 it was the case of excess liquidity driving the markets to crazy heights. Today it is the lack of liquidity which is driving the markets to unprecedented lows, which is far away from the fundamentals of the economy. RBI in its endeavour to give excessive importance to inflation management has stiffled liquidity in the markets. Inflation in India was mainly due to the commodity bubble which had burst in August- September 2008. RBI did not relax liquidity at that time, which has now cast its shadow on growth. The last weeks reaction of cutting CRR by 250 basis points and temporary repreive in SLR by 150 points is a step in the right direction, but it has come a tad too late. The impact of the cut is evident on some key rates, call money rates have eased to around 7% from 17%-18% last week. There is an urgent need to signal the end to the high interest rates by lowering the reverse repo rate by 50 basis points or more in the RBI policy announcement later this week. The market is gasping with baited breath for that 'lifeline'. Fundamentals of the economy remain qiute strong, hovever, the confidence of investors needs to restored at the earliest. Let us wait for the right signals from RBI on the 24th of this month.