THE ECONOMY-Why Are Interest Rates High

tor 1995-96 has at least one innovation to its credit. It has for the first time attempted an estimate of the consequences of its intervention in the foreign exchange market on the availability of liquidity in the system. This has become necessary because the shift to a liberalised exchange rate and capital flow regime has rendered the rupee susceptible to volatile fluctuations. Since a stable exchange rate is crucial for sustained 'investor confidence', intervention in the foreign exchange market has become a crucial function of the central bank.