now in 2006, to strengthen rbi's regulatory jurisdiction over financial markets in terms of the operations of the forex, money and government securities markets. these legislative changes are expected to empower the rbi in terms of instrument independence and hence the effectiveness of monetary policy. in terms of process, we are also proceeding towards greater transparency and consultation, while increasing the frequency of policy reviews from semi - annual to quarterly. alongside this enhancement in accountability we are also attempting greater transparency in communicating monetary policy. going forward, the key issue, given the institutional empowerment, is the speed and quality of the transmission of monetary policy impulses. this is the subject matter of the following section. ii. monetary transmission consistent with these structural changes in the monetary policy framework, improvements in the channels of transmission emerged early on as a concurrent objective in order to enhance policy effectiveness. accordingly, the rbi simultaneously undertook the development of the domestic financial market spectrum, sequenced into the process of deregulation of interest rates, the withdrawal of statutory pre - emptions, the qualitative improvement in monetary - fiscal coordination and the progressive liberalisation of the exchange and payments regime, including the institution of a market oriented exchange rate policy. the development of financial markets in india encompassed the introduction of new market segments, new instruments and a sharper focus on regulatory oversight. the indian money market was fairly underdeveloped till the mid - 1980s ; dominated by the overnight segment with a narrow base, limited number of participants and administered interest rates since december 1973. in 1987, participation was widened on the lending side and institutions were set up as market makers for the orderly development of the market. select institutions were allowed to borrow from the money market on a term basis and the ceiling on interest rates was withdrawn in 1989. new instruments like certificates of deposit ( cds ) and commercial paper ( cp ) were introduced in 1989 and 1990 and interest rates on money market instruments became progressively market determined. in 1998, the rbi initiated a process of developing the overnight money market into a pure interbank market. the phasing out of non - banks from the money market was sequenced over the period 2000 - 05. non - banks ( except pds who are allowed to operate in the overnight market ) have largely migrated to the new collateralised markets which were developed in consonance. non - banks can now take recourse to collateralised repos outside the rbi for purposes of borrowing and lending of funds. an innovative money market instrument called the collateral

on a number of small saving schemes and provident funds is of special relevance as they generally offer a rate higher than corresponding instruments available in the market as well as tax incentives. as banks have to compete for funds with small saving schemes, the rates offered on long - term deposits mobilized by banks set the floor for lending rates at a level higher than would have obtained under competitive market conditions. in fact, this has been observed to be a factor contributing to downward stickiness of lending rates, which has some implications for the effectiveness of monetary policy. this is a reality that we have to appreciate and live with given the absence of social security coverage and adequate safety nets in the country. these small savings schemes administered by the government through the wide reach of post offices, and some through commercial banks, provide small savers access tax savings instruments that are seen as safe and stable. whereas they do have some impact in terms of blunting monetary transmission mechanisms, they can perhaps be seen as contributing to overall financial stability. benchmarking these administered interest rates to market determined rates has been proposed from time to time. whereas some rationalisation in schemes has indeed been done, more progress will depend on the emergence of better social security and pension systems, and perhaps easier access to marketable sovereign instruments. finally, all sector - specific refinance facilities have been phased out except export credit refinance. a liquidity adjustment facility ( laf ) consisting of repo / reverse repo in government securities has emerged since june 2000 as the main operating instrument of monetary policy. the laf serves two objectives. first, it has provided greater flexibility in addressing day - to - day liquidity mismatches. second, it sets a corridor for overnight market interest rates, imparting stability in the market. the laf rates serve as tools for liquidity management as well as signalling of interest rates. the effectiveness of laf has has perceptibly improved the efficacy of monetary policy transmission. the evolution of autonomous monetary policy in the 1990s also depended on the effective removal of fiscal dominance that had existed earlier through the automatic monetisation of fiscal deficits. over the period 1994 - 97, this subvention was phased out by agreement between the government and the rbi, marking a unique milestone in monetary – fiscal coordination. another important institutional change was the freeing of the rbi ’ s balance sheet from the burden of exchange guarantees accumulated in the pre - reform era. legislative amendments have been carried out, first in 2000 and