the global economic outlook deteriorated sharply, and the indian economy got impacted by the contagion through all the channels – the financial channel, the real channel and the confidence channel. the reserve bank ’ s crisis response included, like in the case of other central banks, both conventional and unconventional measures. in response to the easing of policy interest rates and abundant liquidity made available, market rates eased significantly. yields on 10 - year central government securities fell from 8. 6 per cent at end - september 2008 to 5. 3 per cent by end - december 2008. this trend has since reversed with yields hardening since the beginning of the current calendar year on the back of large and abrupt increase in the government borrowing programme. in contrast, interest rates on bank deposits and loans have exhibited stickiness. while the reserve bank cut the effective policy rate by 575 basis points, banks ’ benchmark prime lending rates ( bplrs ) have seen a reduction of only 100 - 275 basis points. this stickiness has impeded monetary transmission and blunted the intended impact of policy actions. what is the explanation for the stickiness in the interest rate structure of banks? there are several factors that cause this stickiness – the higher rates of interest offered by the small savings instruments which discourage banks from reducing deposit rates, the high cost of deposits raised by banks during earlier tighter monetary policy regime which raised their weighted average costs, and the large government borrowing programme which pushed up yields on government securities. these factors, which impeded monetary transmission, were in play even before the crisis. a definite task going forward will be to address the impediments to monetary transmission. fourth concern : fiscal stimulus – withdrawal and quality of adjustment like in other economies, fiscal stimulus measures and weakening of economic activity have led to substantial increase in our fiscal deficits. the central government ’ s fiscal deficit is budgeted to jump from 2. 7 per cent of gdp in 2007 - 08 to 6. 8 per cent in 2009 - 10 ; the combined fiscal deficit of the centre and the states is expected to increase from 4. 2 per cent of gdp to 10. 2 per cent over the same period. these deficits are large and need to be rolled back. what is the scope for adjustment? what lesson does our past experience offer? as a result of the discipline imposed by the fiscal responsibility and budget management ( frbm ) act, the centre ’ s fiscal deficit came down from 6. 2 per cent of gdp in 2001 - 02

evolved over the years to facilitate efficient management of public debt and development of secondary markets. the supply side – from monetisation of debt to market - based debt management 9. the development of the g - sec market was greatly facilitated by the abolition of automatic monetization of government debt, introduction of the auction process for issuance and enactment of frbm act, 2003. the next phase of reforms was directed towards institutional development, including the institution of primary dealers ( pds ) ; establishment of the clearing corporation of india ltd. ( ccil ) – a central counterparty for guaranteed settlement – and formation of market bodies such as the fimmda and the pdai. since december 2015, a medium - term debt management strategy ( mtds ) has been articulated which revolves around three broad pillars, viz., borrowing at low cost over a medium term, risk mitigation and market development. 10. issuances of g - secs are made in different maturity buckets, enabling the formation of a yield curve up to 40 years. secondary market liquidity is supported by building up issue sizes through reissuances. the consequent rollover risk is managed through active consolidation using buyback / switches. 11. transparency in supply was enhanced through the introduction of issuance calendars for auctions in g - secs since april, 2002. auctions are conducted electronically, which ensure transparency as well as efficiency. product diversity is ensured through various instruments, including inflation - linked bonds and floating - rate bonds. treasury bills and cash management bills are issued to smoothen government cash flows. regulatory provisions for issuance of separate trading of registered interest and principal of securities ( strips ) have also been made to facilitate the development of a zero - coupon yield curve and to attract retail investors to the g - sec market. going forward, it would be desirable for the reserve bank and the market bodies like fimmda and pdai to work together to popularize the strips instrument further. niche products targeted at retail investors also include sovereign gold bonds ( a government security denominated in gold ) and savings bonds. the demand side – resilience amidst diversity 12. to impart resilience and diversity to the g - sec market, several steps have been taken to encourage direct retail participation. these steps include provision for non - competitive bidding in primary auctions and the odd - lot segment on nds - om ; permitting banks / primary dealers / stock exchanges to act as aggregators