##rsimham committee recommendations, the reserve bank introduced the liquidity adjustment facility ( laf ) in june 2000 to manage market liquidity on a daily basis and also to transmit interest rate signals to the market. collateralized borrowing and lending operations ( cblo ) was introduced as a new money market instrument in january 2003. the call money market was transformed into a pure inter - bank market by august 2005 in a phased manner. 22. as a result, the money market developed significantly over the years as reflected in increased turnover in various market segments ( table 3 ). along with developing money markets, the reserve bank has also undertaken various measures to develop the government securities and foreign exchange market, increasing the depth of the financial markets ( chart 2 ). 23. all these reforms have also led to improvements in liquidity management operations by the reserve bank as reflected in general containment of call rates within the laf corridor except occasional volatility. apart from imparting stability in call money rates, this has also resulted in greater market integration as reflected in close co - movement of rates in various segments of the money market ( chart 3 ). the rule - based fiscal policy pursued under the financial responsibility and budget management ( frbm ) act, by easing fiscal dominance, contributed to overall improvement in monetary management. 24. during the recent period, the issue of managing large and persistent capital inflows in excess of the absorptive capacity of the economy added another dimension to the liquidity management operations. initially, the liquidity impact of large capital inflows were sterilised through open market operation ( omo ) sales and laf operations. given the finite stock of government securities in the reserve bank ’ s portfolio and the legal restrictions on issuance of its own paper, additional instruments other than laf were needed to contain liquidity of a more enduring nature. this led to the introduction of the market stabilisation scheme ( mss ) in april 2004. under this scheme, short term government securities were issued but the amount remained impounded in the reserve bank ’ s balance sheet for sterilisation purposes. interestingly, in the face of reversal of capital flows during the recent crisis, unwinding of such sterilised liquidity under the mss helped to ease liquidity conditions ( chart 4 ). 25. the efficient conduct of monetary policy is judged ultimately in terms of its ability to stabilise real economic activity and inflation and also ensuring financial stability consistent with the policy objectives.

policy – both the crr and bank rate were raised significantly. the experience of monetary policy in dealing with the objectives of containing inflation and promoting growth eventually led to adoption of monetary targeting as a formal monetary policy framework in 1985 on the recommendations of the chakravarty committee. in this framework, with the objective of controlling inflation through limiting monetary expansion, reserve money was used as operating target and broad money as intermediate target. the targeted growth in money supply was based on expected real gdp growth and a tolerable level of inflation. this approach was flexible as it allowed for feedback effects. crr was used as the primary instrument for monetary control. nonetheless, due to continued fiscal dominance, both slr and crr reached their peak levels by 1990. 12. the worsening of fiscal situation in late 1980s was manifested in deterioration of external balance position and collapse in domestic growth in 1991 – 92, in the backdrop of adverse global shocks – the gulf war and disintegration of the soviet union. the resultant balance of payments crisis triggered large scale structural reforms, financial sector liberalization and opening up of the economy to achieve sustainable growth with price stability. concurrently, there was a shift from fixed exchange rate regime to a market determined exchange rate system in 1993. in the wake of trade and financial sector reforms and the consequent rise in foreign capital flows and financial innovations, the assumption of stability in money demand function as well as efficacy of broad money as intermediate target came under question. at the same time, there was a notable shift towards market - based financing for both the government and the private sector. in fact, automatic monetisation through ad hoc treasury bills was abolished in 1997 and replaced with a system of ways and means advances ( w mas ). during this period, average domestic growth rate was 5. 6 per cent and average wpi - based inflation was 8. 1 per cent. 1998 to 2015 : multiple indicators approach 13. as liberalisation of the economy since the early 1990s and financial innovations began to undermine the efficacy of the prevalent monetary targeting framework, a need was felt to review the monetary policy framework and recast its operating procedures. as a result, the reserve bank of india adopted multiple indicators approach in april 1998. under this approach, besides monetary aggregates, a host of forward looking indicators such as credit, output, inflation, trade, capital flows, exchange rate, returns in different markets and fiscal performance constituted the basis of information set used for monetary policy formulation. the enactment of