The Planning Commission suggested on Tuesday that the key rate (repo) at which RBI provides short-term liquidity to banks should be lowered, as it would automatically bring down commercial interest rates.

"The only interest rate which you can change is the repo rate which is the maximum short term rate at which the banks can borrow from RBI. Yes... you can lower that rate, and it probably would be a signal but that will not determine the structure of lending rate.

Repo rate is 9 per cent and Reverse Repo as well as Bank rate stand at 6 per cent. RBI cut CRR, the amount of cash banks need to keep with the central bank, by 1.5 per cent in two tranches last week releasing Rs 60,000 crore (Rs 600 billion) into the cash-starved banking system.

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"When you expand liquidity, interest rates will automatically come down," Commission Deputy Chairman told PTI when asked about the task ahead to overcome the impact of the global financial crisis on India.

Replying to questions on RBI shifting from tight monetary policy till a few weeks back to a liberalisation stance, he said: "I don't regard the steps that government has taken as a contradiction or reversal of earlier policy as if the earlier policy was wrong.

"Rather, it is the correct response in the light of the change in the international situation which has led to drying up of liquidity even in India."

On the task ahead, he said: "I think the most important thing right now is to ensure that there is trust in the system and that the banks function effectively. There were complaints that liquidity was reduced and people were not able to borrow easily from the banks... this problem has been eliminated for now."

Analysing the reasons for the problem of financial crisis, Ahluwalia said it was really the consequence of a global financial development.

"When there was a lot of liquidity coming from the external sources, we were restraining the domestic liquidity that we were creating. Now that the external sources have temporarily dried up we are expanding domestic liquidity that is being created.

"The 150 basis points cut in CRR became operative on Saturday and would be reflected in lending later," the plan panel chief said.

"There should be no assumption whatsoever that the monetary policy of the last year or so is the cause of the present problem. In fact, the tightness of liquidity has been evident only in September. Up to September, there was little evidence of tightening of liquidity.

"From September onwards we have felt the effects of international shrinkages of liquidity. Many of our firms that were borrowing abroad suddenly found that they would not be able to do so or only they can do so at much higher interest rates," he said.

He further said foreign institutional investors, who are investing in India are feeling tightening of liquidity in their home bases and began to redeploy their resources so there was so some outflow from the Indian market.