Liquidity crunch due to high inflation: RBI

RBI Deputy Governor K C Chakrabarty on Thursday said supply will remain squeeze as long as inflation remains high.

"Liquidity will be tight when we are fighting inflation. But settlements are also happening. Liquidity will remain tight till inflation comes down," Chakrabarty told reporters.

Since January 24, the apex bank has cut the cash reserve ratio by a hefty 1.25 percentage points to 4.75 per cent, releasing as much as Rs 80,000 crore into the system, while it has conducted open market operations by buying back government securities worth over Rs 1.25 trillion during the period.

He also warned that the rising oil prices pose added threat to the domestic authorities as it will fuel inflation. "Any commodity price rise puts pressure on inflation."

On the continuing fall in the rupee, Chakrabarty said, "Fair value of a currency is what the market determines. We interfere when there is excessive volatility."

Between last August and December the domestic unit had lost nearly 18 per cent, but recovered since mid January, only to keep falling since the Budget.

Today the rupee plunged by a whopping 50 paise and closed below the sensitive 51-level against the dollar after more than two months against amid a steep fall in stocks. On the volatility in the capital inflows, he said this is matter of concern.

After pumping in a record $29 billion in 2010, the FIIs turned net sellers last year and pulled out nearly $400 million from the domestic market.