In the next few days the RBI should further reduce the cash reserve ratio. The cuts in CRR last week will bring some relief to the system but it will not be enough to take account of emerging tightness. The RBI should be prepared for further, sharp cuts in the CRR. Homeopathic cuts may not be enough. Similarly, the RBI should consider cutting the statutory liquidity ratio substantially. Oil bonds should be made SLR eligible. This is the time to put the issue of liquidity ahead of all others. With these steps, along with a pro-active RBI that should be ready to step in as a lender of first resort, the extreme tightness in liquidity can possibly be tackled.
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