In the Indian economy, inflation today occupies centre stage after more than doubling in four months to reach 7.33 per cent. This is more than the three-year peak and far above the RBI's comfort level of five per cent. It was expected that the Central bank would hike the repo rate ,which is its main inflation-fighting machine. However it chose to leave the repo and reverse repo rates and Bank Rate unchanged. Of course, already the repo rate is at a six-year high of 7.75 per cent.

Of course, rising inflation left the Reserve Bank little choice but to accelerate its tightening mode. It therefore decided to hike Cash Reserve Ratio for the second time in a fortnight to 8.25 per cent. Last week's action had squeezed out Rs 18,500 crore from the system. On Tuesday it hiked the percentage of cash commercial banks should keep in reserve by 0.25 per cent to suck out excess liquidity, a move aimed at tempering demand for loans and easing inflation from three- year highs. The latest increase would suck out over Rs 9,000 crore excess funds from the banking system.

Markets, as expected, have cheered the latest credit policy. The Nifty and Sensex advanced soon after the announcement,. Similarly, .the realty and auto sectors which are related directly to the banking sector will also have a corresponding positive effect. This is to be expected.

However, the moot question is if inflation can be controlled just by fiscal corrections. It is time the Government thought of increasing the supply.