of current account convertibility and the phased and gradual opening of the capital account. the availability of derivatives is also helping domestic entities and foreign investors in their risk management. this approach has helped india in being able to maintain financial stability right through the period of economic reforms and liberalisation leading to continuing opening of the economy, despite a great degree of volatility in international markets, particularly during the 1990s. financial market integration the success of a monetary policy transmission framework, which relies on indirect instruments of monetary management such as interest rates, is contingent upon the extent and speed with which changes in the central bank ’ s policy rate are transmitted to the spectrum of market interest rates and exchange rate in the economy and onwards to the real sector. changes in the central banks ’ policy rates can, through variations in domestic money market interest rates, impact the exchange rates, which, in turn, impact the real economy. similarly, movement in policy interest rates can influence other asset markets such as equity and property prices, further strengthening monetary transmission. if markets are weakly integrated, the central bank ’ s interest rate signals will not have the desired impact on other short and long - term interest rates, the exchange rate and other asset prices. in such a scenario, the central bank would need to act in various segments of the market to achieve the desired objectives. in brief, the greater the degree of integration across market segments, the stronger is the transmission of monetary policy to the spectrum of financial markets and on to the real economy. by enabling dispersion of shocks and risks to a particular segment across all markets, well - integrated markets also contribute to financial stability. financial market reforms in india have enabled a greater integration of various segments of the financial market, reducing arbitrage opportunities, achieving higher level of efficiency in market operation of intermediaries and increasing efficacy of monetary policy in the economy. growing integration of financial markets beginning 2000 could be gauged from cross correlation among various market interest rates. the correlation structure of interest rates reveals several notable features of integration of specific market segments ( table 6 ). table 6 : correlation among major financial markets rrepo call tb91 tb364 yield10 cds cps fr1 fr3 fr6 exch lbses ( april 1993 to march 2000 ) rrepo 1. 00 call 0. 35 1. 00 tb91 0. 44 0. 61 1. 00 tb364 0. 32 0. 40 0. 90 1. 00 yield10 0. 04 0.

terms of trading platform and settlement mechanisms. as a result of various reform measures, liquidity in the foreign exchange market increased by more than five times between 1997 - 98 and 2006 - 07 ( table 3 ). in relative terms, turnover in the foreign exchange market was 6. 6 times the size of india's balance of payments during 2005 - 06 as compared with 5. 4 times in 2000 - 01 ( table 4 ). with the deepening of the foreign exchange market and increased turnover, income of commercial banks through such transactions increased significantly. profit from foreign exchange transactions accounted for more than 20 per cent of total profit of scheduled commercial banks in the last 2 years. table 3 : turnover in the foreign exchange market turnover in us $ billion share of spot turnover in per cent year merchant inter - bank total merchant inter - bank total 1997 - 98 57. 6 50. 3 51. 5 1998 - 99 52. 9 49. 4 50. 0 1999 - 00 62. 3 50. 8 53. 3 2000 - 01 65. 2 45. 2 49. 1 2001 - 02 64. 0 39. 8 44. 1 2002 - 03 57. 9 42. 7 45. 9 2003 - 04 53. 1 48. 7 49. 7 2004 - 05 48. 2 50. 5 50. 0 2005 - 06 45. 0 52. 7 50. 6 2006 - 07 ( p ) 46. 2 54. 2 52. 0 ( p ) : provisional table 4 : size of the foreign exchange market year foreign exchange market - annual turnover ( $ billion ) bop size ( $ billion ) col. 2 over col. 3 2000 - 01 5. 4 2001 - 02 6. 0 2002 - 03 5. 8 2003 - 04 5. 9 2004 - 05 6. 0 2005 - 06 6. 6 2006 - 07 n. a. n. a. efficiency in the foreign exchange market has also improved as reflected in the decline in bid - ask spreads. the bid - ask spread of rupee / us $ market has almost converged with that of other major currencies in the international market. on some occasions, in fact, the bid - ask spread of rupee / us $ market was lower than that of some major currencies ( chart 9 ). the emes ’ experience, in general, in the 1990s has highlighted the growing importance of capital flows in determining the exchange rate movements as against trade flows and economic growth in the 1980s and before. in the case of