After fiscal-consolidation, it time for monetary-policy-action...

RBI says liquidity is ample in the market, but demand is down. Demand is down due to high inflation and interest-rates which also restrict supply. There are two ways to match demand with supply. One way is to bring liquidity and supply down to the demand level, the way RBI wants to go. And, the other is to increase demand to the supply-level. Lowering liquidity and supply will further increase inflation and interest-rates. However if we increase liquidity and supply it will lower inflation and interest-rate, demand will go-up. If demand and inflation is a problem, then more liquidity and supply may reduce relative demand which will also lower inflation and interest rate. The RBI is following the former way, which may diverge the economy from its long-run equilibrium, because less liquidity or supply might increase inflation and interest-rate which may further weaken demand. Everytime demand relative to supply will go down, the RBI would reduce supply to match demand and the economy would fall in a downward-spiral, less and less demand and supply will reduce growth-rate. Nonetheless, if the RBI increases liquidity and supply, inflation and interest-rate will go down, demand relative to supply will go–up and everytime demand will go up the RBI will try to increase liquidity or supply to achieve price-stability, full-employment, and higher growth-rate. Increasing liquidity and supply could lower inflation and interest-rate, and, will increase demand and growth-rate.  Higher interest rate also adds to inflation by increasing the borrowing-cost. Lower interest rate means high supply and demand. Monetary and fiscal policies work differently. The latter directly adds to wages and effective-demand, responsible for inflation which INDIA saw since 2004, while the former was used to control it... Monetary-policy had a very little room to work, only concentrated on inflation control by tightening demand instead of increasing supply... Monetary-easing became possible on after fiscal-consolidation... The crowding-out effect, a long-time issue... When monetary-policy works market tries to lower prices because of price competition... But, fiscal-policy makes the government the only player without competition... It itself decide or play an important role in determining all the prices...

Paul Krugman suggests easy money for Greece, like Canada...

Yes, it is right that Canada has maintained a good-level of unemployment, but never lower than 6%, nonetheless closer to five percent which has only been possible because of lower prices...

Lower inflation made it possible to lower interest-rate, and increase fiscal-deficit and debt...

The issue of currency-debasing never arised...     

The economy even with so much of private and public-spending due to low interest rate never showed signs of overheating...      

Inflation has remained below 5% from decades... and unemployment also fell considerably, but never below 6% after 80s...      

Negative current-account-deficit means surplus that shows exports are higher than imports...  

Without doubt increase in money-supply and depreciation increase exports and helped achieve close to full-employment unemployment-rate...      

More money-supply in a low-price-regime will reduce interest rate and that kept on improving supply-side and helped maintain low inflation and unemployment, and continue expansion in spending...  

Nevertheless, money-supply can work bothways... it may increase inflation and it might reduce inflation, as well... all depends on the supply-side...      

In a more developed and open economy supply-side easily improves with lower interest-rate, unless it is over-supply...      

But, in a developing and less liberalized-economy where domestic production and employment is protected by lower-prices and competition from abroad, supply-side and inflation still might be a problem to follow more money-supply and expansion...

Paul Krugman cannot always suggest easy-money...

For an emerging-economy the old quantity theory of money is still valid...