off - shore funds into idfs, government of india is contemplating the reduction of withholding tax on interest payments on the borrowings by the idfs from 20 per cent to 5 per cent. income of the idfs is also expected to be exempt from income tax. the idfnbfc can raise resources through issue of either rupee or dollar denominated bonds of minimum five year maturity. idfs are expected to channelize funds from insurance companies, pension funds and other long term sources into infrastructure sector. this will provide an alternative source of foreign currency funds for the infrastructure projects. however, certain dimensions need to be kept in mind while assessing the success of the model. infrastructure financing presents quite a few challenges viz., little tangible security, high debt equity ratio, long implementation and repayment periods, etc. banks and financial bis central bankers ’ speeches institutions have over the years gained experience and expertise in assessing and pricing these risks. idfs are likely to face severe challenges on these issues. therefore, these funds have been allowed to invest only in ppp and post commencement operations date ( cod ) infrastructure projects which have completed at least one year of satisfactory commercial operations. of course, idf - mfs can also be set up in respect of non - ppp projects under higher risk - return framework. if a bank has a mutual fund, then it can float an infrastructure debt fund, mop up resources from investors, including private equity and strategic investors, and invest the proceeds in the equity of infrastructure projects. thus, idfs could be game changers in the way infrastructure projects are being financed. tapping the retail investor base through infrastructure bonds to provide further impetus to infrastructure financing, government of india has permitted ifci, idfc, lic and infrastructure finance firms to issue long - term infrastructure bonds providing for tax benefit of up to rs. 20, 000 in the year of investment, under the income tax act. the tax - free status has been granted by the government to these bonds issued only by designated financial institutions. by introduction of such instruments, the retail base can be tapped for raising funds for infrastructure projects. of the proposed rs. 30, 000 crore funds to be raised, national highway authority of india ( nhai ) & the railway finance corporation are raising rs. 10, 000 crore each and hudco another rs. 5, 000 crore. major steps taken by the reserve bank the reserve bank has initiated a number of regulatory measures / concessions for facilitating increased flow of credit to

. 3 per cent at end march 2006, while the net non - performing assets have declined from 4. 0 per cent to 1. 2 per cent during the same period. financial markets development of financial markets received a strong impetus from financial sector reforms since the early 1990s. the reserve bank has been engaged in developing, widening and deepening of money, government securities and foreign exchange markets combined with a robust payments and settlement system. a wide range of regulatory and institutional reforms were introduced in a planned manner over a period to improve the efficiency of these financial markets. these included development of market micro structure, removal of structural bottlenecks, introduction / diversification of new players / instruments, free pricing of financial assets, relaxation of quantitative restrictions, better regulatory systems, introduction of new technology, improvement in trading infrastructure, clearing and settlement practices and greater transparency. prudential norms were introduced early in the reform phase, followed by interest rate deregulation. these policies were supplemented by strengthening of institutions, encouraging good market practices, rationalised tax structures and enabling legislative and accounting framework. ii. a review of monetary policy challenges the conduct of monetary policy has become more challenging in recent years for a variety of reasons. many of the challenges the central banks are facing are almost similar which could be summarized as follows : challenges with globalisation first, globalisation has brought in its train considerable fuzziness in reading underlying macroeconomic and financial developments, obscuring signals from financial prices and clouding the monetary authority ’ s gauge of the performance of the real economy. the growing importance of assets and asset prices in a globally integrated economy complicates the conduct of monetary policy when it is focused on and equipped to address price stability issues. second, with the growing integration of financial markets domestically and internationally, there is greater activism in liquidity management with a special focus on the short - end of the market spectrum. there is also a greater sophistication in the conduct of monetary policy and central banks are consistently engaged in refining their technical and managerial skills to deal with the complexities of financial markets. as liquidity management acquires overriding importance, the evolving solvency conditions of financial intermediaries may, on occasions, get obscured in the short run. no doubt, with increasing globalization, there is greater coordination between central banks, fiscal authorities and regulatory bodies governing financial markets. third, there is considerable difficulty faced by monetary authorities across the world in detecting and measuring inflation, especially inflation expectations. recent experience in regard to