in the union budget and other related documents transparently as distinct components under separate sub - heads. the introduction of mss has succeeded, in principle, in restoring laf to its intended function of daily liquidity management. since its introduction in april 2004, the mss has served as a very useful instrument for medium term monetary and liquidity management. it has been unwound in times of low capital flows and greater liquidity needs and built up when excess capital flows could lead to excess domestic liquidity. in principle, the mss is designed to sterilise excess capital flows that are deemed to be durable or semidurable. in practice this is difficult to discern ex - ante : hence the range of mss instruments in terms of their duration can effectively modulate the sterilisation on an ex - post basis. our strategy of introducing this new mss instrument to manage excess capital flows and reduce volatility in the exchange rate reflects the overall issue of global capital flows that many developing countries are facing, particularly in asia. net private flows ( equity + debt ) have increased from an average of about us $ 180 billion over the five year period 1998 to 2002, to about us $ 650 billion in 2006, amounting to about 5 per cent of their gdp ( world bank, 2007 ). absorption of such a volume of flows would imply a corresponding current account deficit of about 5 per cent of gdp. what should be the approach to exchange rate determination in such circumstances? to what extent is the current account balance a good guide to evaluation of the appropriate level of an exchange rate? to what extent should the capital account influence the exchange rate? what are the implications of large current account deficits for the real economy? are they sustainable and, if not, what are the implications for financial stability in developing countries? in india's case, as mentioned, we have almost always had a modest current account deficit though, because of remittances and service exports, the trade deficit has widened significantly in recent years. these are the issues that we have to deal with as we negotiate fuller capital account convertibility, but i believe these are wider questions that are engaging most countries in asia. going forward, there will be a continuous need to adapt the strategy of liquidity management as well as exchange rate management for effective monetary management and short - term interest rate smoothening. the key questions we continue to face with are what should be the instruments and modes of management of liquidity in

on government securities with the attendant implications for the yield curve and, in turn, for monetary transmission. the secondary market for corporate debt has suffered from lack of market making resulting in poor liquidity. corporates continue to prefer private placements to public issues for raising resources in view of ease of procedures and lower costs. there is a need for development of mortgage - backed securities, credit default swaps, bond insurance institutions for credit enhancement, abridgment of disclosure requirements for listed companies, credit information bureaus, rating requirements for unlisted companies, real time reporting of primary and secondary trading, and eventual retail access to the bond market by non - profit institutions and small corporates. a concerted effort is now being made to set up the institutional and technological structure that would enable the corporate debt market to operate. furthermore, the on - going reforms in the area of social security coupled with the emergence of pension and provident funds are expected to increase the demand for long - term debt instruments. in the process, the investor base for government securities would be broadened, extending the monetary transmission across new players and participants. for monetary policy to be more effective, the monetary transmission process has to be improved on a continuous basis so that price discovery is better. in this endeavour, we need to keep developing the various financial markets, increase their connection with credit markets, remove distortions in the market and reverse current tendency to move back to administered interest rates. iv. development of financial markets there has been a great deal of progress in developing the money market, government securities market and forex market. with greater capital account openness, we need to develop them further to enable market participants to absorb greater volatility and shocks. each of these markets needs to be deeper. in the context of progress towards further capital account convertibility, the market participants are going to be faced with increased risks on multiple accounts : volatility in capital flows, volatility in asset prices, increased contagion and state of ability of legacy institutions in managing risks. money market the money market remains fragmented with different segments giving rise to different overnight rates. the call money market, which remains an uncollateralised market has now become a pure inter - bank market amongst banks and primary dealers with the withdrawal of non - banks. alongside, primarily for non - bank participants at the shorter end, there is the market repo outside the repo market under the liquidity adjustment facility. this is a collateralised segment