which mitigates the moral hazard arising out of deposit insurance as in the case of banks. third, debt market can help develop the derivatives market thereby facilitating hedging mechanisms and enabling greater diversification of risks by participants. also, the variety of instruments possible in the domestic debt market may result in gains to savers and borrowers. it is also essential to recognise that domestic debt markets may not be able to deliver in reality all that is sought from them. the efficiency of bond markets would depend on the efficiency of credit rating agencies ( cras ), standards of accounting, auditing and disclosures, institutional infrastructure, prevalence of an environment for enforcement of contracts, etc. bond markets may not necessarily reduce systemic risk since banks themselves could be major players in bonds as issuers, investors and underwriters. development of a debt market for long - term instruments would also require complementarity of policies such as flexibility in interest rates, enabling legal environment, etc. though higher degree of transparency is to be expected, it has been argued that where sophisticated instruments like options exist, transparency in debt markets may not be automatically ensured. furthermore, a domestic bond market by itself need not necessarily address the fundamental issues of risk management and pricing of risk. on balance, the current realities would lead one to believe that the banking system will continue to be at the centre of the financial system in emerging economies. in fact, banks are likely to have significant direct or indirect presence in the debt market as issuers, investors or underwriters. if the overall environment in the financial sector contains problems in pricing of risks by banks, bond markets too can suffer infirmities in pricing. as the financial system is evolving, bank loans and bond contracts must be treated as complementary and to some extent as substitutes. in view of the undeniable benefits of a multi - institutional financial structure, a number of countries are rightly devoting considerable resources and attention to the development of domestic bond markets, though each country may have different motivations for doing so. 2. motivations for development of domestic debt markets the main provocation for undertaking the task of development of debt markets would depend to some extent on the different histories and cultures of countries, but predominantly on economic factors such as experience with high inflation, transition from planning, restructuring economies after crisis, etc. more specifically, and in the context of the financial system, the objectives may relate to financing government deficit, funding bank restructuring, creating a more complete financial markets, avoiding

money markets. in regard to the money market in india, the basic objective in recent years has been to develop a short - term yield curve with deep liquidity. a four - fold strategy has been adopted in this regard. first, a liquidity adjustment facility has been in operation, comprising repo and reverse repo operations through auctions conducted with a view to equilibrating the liquidity and keeping the short - term interest rates within an informal corridor. second, the call money market is being developed as a pure inter - bank market with a phased withdrawal of non - bank participants who are currently lenders in the call money market. third, the traditional sector - specific refinance support is being rationalized and additional recourse to the established liquidity facilities is being made increasingly market - based. removal of established facilities on fixed terms and moving to a full - fledged liquidity adjustment facility ( laf ) is on the active agenda. fourth, the other money market segments, especially the repo market are being developed with lending as well as borrowing access to the non - banks in these markets. to help the process, a clearing corporation of india ltd. ( ccil ) has been established. operational issues relating to primary market ensuring efficient price discovery process is a dominant objective of operations in primary markets and for this purpose putting in place credible systems and ensuring transparent mechanisms are critical. auction technique and central bank participation in auctions auctions are the most common method for sale of government securities, though securities are also distributed through tap sales, syndication and book building process. in many countries, direct participation in auction is restricted to select investors while a larger investor base is permitted to enter auctions through designated intermediaries such as banks and primary dealers. the actual modalities of reaching the investor base would be governed by pragmatism and in fact even choices in auction techniques or even combination of techniques may in some circumstances be linked to permitted pattern of participation. as regards technique, discriminatory price auctions keep away investors because of the winners curse, whereas there are dangers of irresponsible bidding and of collusion in a uniform or dutch type of auction. countries have moved between discriminatory and uniform price auctions, but there is no settled wisdom as to which type of auction is better. an interesting variant that merits further consideration is a combination of the features of both auctions, i. e., discriminatory price auction with a ceiling, in order to