The overnight call money market is back to where it was a fortnight ago, with interest rates in the sky-high, 14-21 per cent range. The 1 percentage point cut in the repo rate announced at the beginning of last week had a temporary effect, because call rates crashed, but the underlying shortage of money has once again manifested itself; so the repo rate cut announced 12 days ago looks now like doing you-know-what in the wind.

In other words, the clamour for lower interest rates may be missing the point. High interest rates are only symptoms of the real problem, which is the shortage of money.

The numbers tell the story. Foreign exchange reserves dipped by $15 billion this past week, were flat the week before, and dipped by about $10 billion the week before that.

In both weeks when the rates in the call money market went through the roof, RBI was busy selling dollars and sucking rupees out of the system � i.e., tightening liquidity. In October as a whole, RBI sold $33 billion, almost certainly the largest monthly sale figure ever. In the previous four months of 2008 (after RBI reserves peaked in May), the total decline in RBI reserves was only $24 billion.

RBI must have good reason for selling dollars and sucking rupees out of the market. There would have been substantial pressure in terms of dollar outflows, which could send the rupee on a nose-dive if RBI did not intervene; and there are few (if any) people who would want that. But the price of protecting the rupee's exchange value is being paid by domestic borrowers, as rupees become scarce in the market.

Don't blame foreign institutional investors for the dollar outflows; they sold less than $4 billion worth of stock in all of October. There are other, much larger forces at work - like the drying of international trade credit, forcing Indian firms trading internationally to borrow from Indian banks instead.

The big Indian companies have also been busy financing their overseas acquisitions with Indian money, because overseas money is not available - that's more rupees taken out of circulation.

And Indian banks with liquidity-strapped international operations have been supporting them with money sent from here - yet another way in which rupees have been sucked out. All three are manifestations of the global liquidity problem forcing domestic entities to look to domestic money, so that demand for rupees has shot up precisely when it is scarce.

But there is a purely domestic issue as well: people have been pulling money out of mutual funds and putting them in banks; but close to a third of bank money is immediately impounded - for holding as cash, or investing in government securities.

As people take mutual fund money and put it in banks, they are helping to reduce the amount of money available to the non-government sector.

With all these forces combining to suck out money, RBI's primary task has to be to put money back in circulation. The best and easiest way to do that is to halve the cash reserve ratio to the statutory minimum of 3 per cent.

That might sound like drastic action, but it will immediately release about Rs 1,23,000 crore (Rs 1,230 billion) into the market. If nothing else, that will neutralise the domestic monetary impact of RBI's actions in October, when it sold dollars equivalent to Rs 1,65,000 crore (Rs 1,650 billion).