Inflation is a barometer of the success with which this is in fact beingachieved. Interest rates are set to control the rate of inflation: To meetthe singular aim of monetary policy -- the control of inflation. Policiesrelax when inflation is falling and is low and become tighter as inflationis high and rising.

India today is in a peculiar situation. We suffer from slack in the system:The economy is performing well below its full employment capacity; inflationis very low, perhaps rising slightly. The international economy is reviving.Our interest rates are one of the highest in the world! Real rates ofinterest are well over 10 per cent when policies ought to be relaxing ratherthan tightening!

It is my belief that nominal interest rates must be reduced substantially --not just be a point or two. Benchmark rates (postal savings, provident fundrates) must be lowered doing away with fixed guaranteed rates of return.

This will in turn send a signal to the rest of the economy that the termstructure of interest rates must be market determined. It is the only way ofensuring the emergence of a debt market that is truly market driven.

The credit policy should signal lowering of rates, rationalisation of theCRR and liquidity ratios - by this I mean that these ratios should tendtoward prudential levels and not be a means of taxing the banking system --and strong measures should be taken to do away with administered rates.Thereis an enormous capacity in the system to mobilise resources for development-- especially for infrastructure investments. Appropriate instruments whichensure long maturities as well as liquidity are essential if this is to beachieved. Secondary activity would need to be stimulated and the monetaryauthorities should be ready to create the conditions for these markets toemerge.

India needs massive quantities of credit at all levels in the economy. Whilethe formal institutional structure performs this function; capital marketsand debt markets become a source of raising resources; a much greater needis felt at the informal level - in urban communities and in rural areas.

Microfinance has become a better understood activity and its potential tostimulate economic well being cannot be underestimated.

In this credit policy, very clear directions should be established tostimulate the growth, development and regulation of a whole class ofinstitutions that have enormous potential to enhance economic livelihoods.Monetary policy is a necessary not sufficient condition for a consistentlyevolved economic strategy.The other half of the story is fiscal policy. Anexpansionary monetary policy at this time has little risk of fuellinginflation given the underperforming economy. It will set the scene for asupportive fiscal policy designed to stimulate investment and savings thusachieving much higher growth trajectory for the Indian Economy.

Two key drivers for change would be a massive investment programme ininfrastructure, especially that part of infrastructure which stimulatesconstruction activity. Housing has already been boosted; a massiveroad-building programme would offer a combined driver for growth withenormous multiplier effects spreading throughout the country. India nowneeds a conducive investment climate as well as fairly carefully defineddrivers for change.