quality securities against securities facing illiquidity risks. this becomes necessary to unfreeze the markets in general. after the global crisis, asset quality, particularly liquidity, has received greater policy focus. money market rates also reflect market expectations of how the policy rate could evolve in the near term. as per standard expectations hypothesis, money market rates for different time duration should equal expected future short - term rates, plus term premium and risk premium. bernanke ( 2004 ) 1 had examined how expectations of the likely future course of the federal funds rate respond to the fed ’ s policy actions and statements and noted that “... our findings support the view that fomc statements have proven a powerful tool for affecting market expectations about the future course of the federal funds rate ”. empirical research suggests that if the shortest end of the money market, which is influenced the most by policy rate, is stable, or less volatile, then it may help in keeping term premium lower, compared to a period when volatile short rates get transmitted to the entire money market and simultaneously the term premium rises. with the sophistication of financial markets rendering the money, output and price relationship unstable, by the early 1980s, major central banks began to emphasise on the price channel, i. e., policy interest rate for monetary policy transmission. as a result, the role of money market became all the more important for signaling and transmission of monetary policy. thus, the development of money markets across countries in terms of instruments and participants with varying risk profiles has necessitated changes in the operating procedures of monetary policy. in the case of india, the ultimate goals of monetary policy, i. e., price stability and growth, have remained unchanged over the years. in the recent years, financial stability has been considered as an additional objective of monetary policy. however, operational and intermediate objectives of monetary policy have undergone periodic changes in response to changes in the economic and financial environment. the development of the money market over the years and relative stability in the call money market enabled the reserve bank to move away from quantity - based instruments to price - based instruments under its multiple indicators approach adopted since 1998. accordingly, the overnight call rate, which was used implicitly as operating target since the institution of liquidity adjustment facility ( laf ) in 2000, became explicit after the adoption of a new operating procedure in may 2011. bernanke, ben s. ( 2004 ), “ central bank talk and monetary policy ”, at the

japan society corporate luncheon, new york, october 7. bis central bankers ’ speeches money market in india financial reforms in india began in the early 1990s. however, various segments of domestic financial markets, viz., money market, debt market and forex market underwent significant shifts mainly from the 1990s. earlier, the indian money market was characterised by paucity of instruments, lack of depth and distortions in the market micro - structure. it mainly consisted of uncollateralised call market, treasury bills, commercial bills and participation certificates. following the recommendations of the chakravarty committee ( 1985 ), the reserve bank adopted a monetary targeting framework. at the same time, efforts were made to develop the money market following the recommendations of vaghul committee ( 1987 ). in this regard, important developments were : ( i ) setting up of the discount and finance house of india ( dfhi ) in 1988 to impart liquidity to money market instruments and help the development of secondary markets in such instruments ; ( ii ) introduction of instruments such as certificate of deposits ( cds ) in 1989 and commercial papers in 1990 and inter - bank participation certificates with and without risk in 1988 to increase the range of instruments ; and ( iii ) freeing of call money rates by may 1989 to enable price discovery. however, the functioning of the market continued to be hindered by a number of structural rigidities such as skewed distribution of liquidity and the prevalence of administered deposit and lending rates of banks. recognising these rigidities, the pace of reforms in money market was accelerated. following the recommendations of an internal working group ( 1997 ) and the narasimham committee ( 1998 ), a comprehensive set of measures was undertaken by the reserve bank to develop the money market. these included : ( i ) withdrawal of interest rate ceilings in the money market ; ( ii ) introduction of auctions in treasury bills ; ( iii ) gradual move away from the cash credit system to a loan - based system. maturities of other existing instruments such as cp and cds were also gradually shortened to encourage wider participation. most importantly, the ad hoc treasury bills were abolished in 1997 thereby putting a stop to automatic monetisation of fiscal deficit. this enhanced the instrument independence of the reserve bank ( table 1 ). table 1 major developments in money market since the 1990s 1. abolition of ad hoc treasury bills in april 1997 2. full fledged laf in june 2000. 3. cblo for corporate and