Rate Cut By RBI

In a major move aimed at injecting additional liquidity of about Rs.85000 crores RBI on 1st November 2008 cut CRR by one percent.RBI has also slashed Repo rate by 0.50 percent apart from reducing SLR by 1 percent.These measures are most welcome as the same will go someway in bringing about some optimism in the economy as aginst the irrational pessimism that was created by the earlier RBI governor by hiking rates and by creating liquidity constraints.
I had clearly stated in my letter to editor in Business Line dated 11th August 2008 that RBI was indeed committing some sort of excesses in monetary tightening by means of repeated rate hikes and CRR hikes.I had pleaded for stopping further rate hikes in my letters.But RBI went on hiking rates and increasing CRR.After every hike in rate and after every increase in CRR there was alarming increase in inflation rate.RBI must have noticed this then and there and stopped further rate hikes.But RBI did not do so.It increased rates further and hiked CRR again.Now the new RBI governor had to take these correctional measures to save the economy from decline and to help the growth process.
In India galloping inflation was not on account of excess liquidity and excess demand as perceived by RBI.It was because of supply constraints and global factors including galloping crude oil prices.I ma happy that at least now RBI has taken these correctional steps.
RBI must cut repo rate by one percent again by the end of December 2008.Similarly CRR must be cut by one percent by December end.RBI must adhere to the reform target of reducing CRR to 3 percent and ensure that CRR is reduced to 3 percent within one year from now.What we need in India is a cheap money policy in a situation like this and not the dear money policy adopted by DR Y.V.Reddy earlier RBI governor.The present measures of RBI will surely go sme way in creating optimism in the economy and also in spurring growth and growth and expansion efforts.