government borrowings and the fiscal dominance, administered interest rates and the large size of unorganized sector. deregulation and liberalization of the financial markets combined with increasing openness of the economy during this period necessitated some changes in this framework. consequently, a multiple indicator approach was announced in 1998 - 99, wherein interest rates or rates of return in different markets ( money, capital and government securities markets ) along with such data as on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange available on high frequency basis are juxtaposed with output data for drawing policy perspectives. such a shift was gradual and a logical outcome of measures taken over the reform period since early nineties. thus the ‘ exclusive ’ use of broad money as an intermediate target was de - emphasised, but the growth in broad money ( m3 ) continues to be used as an important indicator of monetary policy. in a deregulated financial environment with reasonably open capital account, monetary policy has to respond to unexpected changes on short - term basis. the switchover to a multiple indicator approach provided necessary flexibility to the reserve bank to respond to changes in domestic and international economic and financial market conditions more effectively. in a medium to long - term perspective, the impact of money supply on inflation, however, cannot be ignored and for purposes of policy, the reserve bank still continues to announce projections of money supply compatible with the outlook on growth of gdp and expected inflation. fifth, the institutional context in which monetary policy was conducted was vastly different till very recently. since 1997, a major change has taken place with the discontinuation of the process of automatic monetisation of government deficit. although the mutually agreed ways and means advances ( wma ) sought to put a limit on direct short - term access of funds from the reserve bank to the government, the continued high fiscal deficit made it difficult for the government to reduce its requirement of borrowings from the banking sector. in the process, the reserve bank had to manage liquidity in the system in such a way that the impact of the high fiscal deficit on monetisation as also on interest rates is minimized. in effect, while the fiscal impact on monetisation has been reduced significantly, the interplay between fiscal and monetary operations continued to be significant in the post - 1997 scenario. the overall monetary management becomes difficult with a large and growing borrowing programme of the government

in place quickly to continue with the work of the erstwhile rra both in letter and same spirit. sixth, apart from this, the progress by the various committees in rbi relating to the move towards risk based supervision, macro - prudential indicators etc. will have to be hastened. seventh, follow - up actions on the work by the advisory groups on international standards and codes may be designed in close consultations with the chairmen concerned. finally, keeping abreast with international developments in financial markets as also coping with the dynamics of liberalisation within our country would require continued upgradation of skills of personnel within the rbi. tasks ahead for market participants the monetary policy has bestowed greater flexibility and ushered in a more competitive environment among market participants. first, banks and primary dealers ( pds ) should prepare themselves for stage ii of laf where one - third of the liquidity support normally available to them at fixed rate of interest would now be available at market rate. second, with the reform in the call money market having been announced, banks and non - banks should position themselves for a changed environment. while the total liquidity in the money market would not reduce, the composition between collateralised and non - collateralised liquidity would alter resulting in a new set of dynamics. hence, new counter - party limits would need to be put in place. in fact, with the operationalisation of clearing corporation, the liquidity would improve since more participants and more instruments would be eligible to participate. third, with rationalisation in the primary lending rate ( plr ) norms and more flexibility in fixed deposit maturity and other terms such as premature withdrawal and interest on overdue deposits, the competition among banks could intensify, which would require banks to be more proactive, improve their infrastructure and operational efficiency as also enhance human skills. corporates will also have greater incentive to improve their ratings as better corporates would be able to acquire bank loans at finer rates. fourth, the move to 90 - day norm for non performing assets ( npas ) for banks and 180 - day norm for financial institutions ( fis ) would require changes in the interest rate resets and implicitly alterations in systems and procedures. this would require greater credit discipline on the part of corporates regarding repayment of loans as servicing of loans assumes greater importance. fifth, many of the changes in prudential regulations that have been announced, viz., credit exposures, consolidated accounting and supervision, move to the new