Annual Report

IV.1 Generally stable and liquid financial market conditions during 2004-05 and positive sentiment generated by the macroeconomic fundamentals enabled the Reserve Bank to persevere with the development and integration of the money, the debt and the foreign exchange markets. In view of the abundant global liquidity, high levels of leveraging and uncertainty characterising international financial markets, ensuring a domestic environment that avoids excessive and destabilising volatility became a key objective for the Reserve Bank during the year. Efforts to convert the call money market into a pure inter-bank market were accompanied by several initiatives to deepen the collateralised segments of the money market in order to enable non-bank participants to access/deploy funds. The Reserve Bank continued to develop the Government securities market by expanding the menu of products available, enlarging the investor base and improving the technological infrastructure. Orderly conditions in the foreign exchange market and the significant two-way exchange rate movements during the year facilitated a measured liberalisation of external current and capital account transactions in 2004-05.

IV.2 In pursuance of the proposals set out in the Mid-term Review of the Annual Policy Statement for 2004-05, the Reserve Bank appointed technical groups on the money market, the Government securities market and the foreign exchange market to draw out a medium-term framework for the future course of market development in view of changes in the institutional framework and improvement in technological infrastructure. The recommendations of these groups are being examined and public response has been invited on the Reserve Bank’s website. Certain recommendations have been accepted for implementation in the Annual Policy Statement for 2005-06.

IV.3 Against this backdrop, this Section presents the regulatory and developmental aspects of the Reserve Bank’s oversight of the money, the debt and the foreign exchange markets in 2004-05. The review focuses on improvements in the day-to-day functioning of market segments, upgradation of technological infrastructure, introduction of new instruments and ongoing financial market liberalisation.

IV.5 The process of transforming the call/notice money segment into a pure inter-bank market with a view to facilitating the transmission of monetary policy - in pursuance of the recommendations of the Committee on Banking Sector Reforms (Chairman: Shri M. Narasimham) (1998) - was completed in August 2005 (Table 4.1). This has been supported by the development of a repo market outside the Reserve Bank in which non-bank participants are allowed to trade their surplus/deficit liquidity. Prudential limits have been placed on borrowings and lendings of banks and Primary Dealers (PDs) in the call/notice market. Furthermore, in order to smoothen the transition through 2004-05, the Reserve Bank assured the market that in case of a genuine difficulty, a higher amount may be allowed to be lent in the call/notice money market for a specific period on a case-by-case basis.

IV.6 The Reserve Bank had instituted prudential limits on exposure of banks and PDs to the call/notice

• Capital funds (sum of Tier I and Tier II capital) rather than owned funds as the benchmark for fixing call/notice money exposure limits for scheduled commercial banks; for other entities, present norms may continue.

• Call/notice money market transactions on electronic negotiated quote driven platform; banks and primary dealers (PDs) with appropriate risk management systems and balance sheet structure may be allowed more flexibility to borrow in call/notice money market; larger freedom in lending in the call/notice market accorded to banks and PDs.

Repo/Collateralised Borrowing and Lending Obligations (CBLO): Broad-base the pool of securities to act as collateral for repo and CBLO markets; repo transactions on electronic, anonymous order driven trading system.

Term Money: Reporting of term money transactions on NDS platform compulsory; term money market transactions on an electronic, negotiated quote driven platform.

Certificates of Deposit (CDs): Maturity period of CDs to be reduced to 7 days in line with that of commercial paper (CP) and fixed deposits.

Commercial Paper: Asset-backed CP to be introduced in the Indian market.

Forward Rate Agreements (FRAs)/Interest Rate Swaps (IRS): Limited optionality in rupee derivative segment; legal clarity to OTC derivatives; revised risk reporting system and robust accounting standard.

Timing of liquidity adjustment facility (LAF): Late hour intra-day LAF as and when warranted in future for absorption of residual resources.

money market since a large recourse to this uncollateralised money market segment carries a potential risk of systemic instability arising out of defaults. With effect from the fortnight beginning April 30, 2005, the benchmark for fixing prudential limits on exposures to the call/notice money market in the case of scheduled commercial banks was linked to their capital funds (sum of Tier I and Tier II capital). IV.7 All call/notice money market transactions are required to be reported to the Negotiated Dealing System (NDS) within 15 minutes of concluding the transaction, irrespective of whether the transaction was executed on the NDS or outside and whether the counterparty is a member of the NDS or not. From April 30, 2005, all NDS members are also required to report their term money deals on the NDS platform. A screen-based negotiated quote-driven system for all dealings in call/notice and term money market transactions is envisaged.

IV.8 Collateralised borrowing and lending obligations (CBLOs) were operationalised as a money market instrument through the Clearing Corporation of India Limited (CCIL) on January 20, 2003. With a view to developing the market for this instrument, the Reserve Bank introduced automated value-free transfer of securities between market participants and the CCIL during 2004-05.

IV.9 A repo market outside the liquidity adjustment facility (LAF) has been assiduously developed by the Reserve Bank to provide an avenue for bank and non-bank participants to trade funds after the conversion of the call/notice money market into a pure inter-bank market. In order to broaden the market, non-

scheduled urban cooperative banks (UCBs) and listed companies with gilt accounts with scheduled commercial banks were allowed, subject to eligibility criteria and safeguards, to participate in the repo market outside the Reserve Bank. An electronic trading platform for market repo operations in Government securities, in addition to the existing voice based system, would also be facilitated.

IV.10 The minimum maturity period of certificates of deposit (CDs) was reduced from 15 days to 7 days effective April 29, 2005 to align it with the minimum maturity of commercial paper (CP) and fixed deposits with banks.

IV.11 The Reser ve Bank under took several measures to further develop the CP market during 2004-05. A Status Paper on the CP market in India was placed on the Reserve Bank’s website on July 7, 2004 inviting comments/suggestions from market participants. The issues raised were discussed with market participants as also in the TAC on Money, Foreign Exchange and Government Securities Markets. Based on these deliberations, the Reserve Bank reduced the minimum maturity period of CP from 15 days to 7 days in the Mid-term Review of October 2004 in order to provide an option to issuers to raise short-term resources through CP as also an avenue for investors to invest in quality short-term paper. Issuing and paying agents (IPAs) are required to report issuance of CP on the NDS platform within two days from the date of completion of the issue to provide transparency and also facilitate benchmarking of CP issues. Following the supply of relevant software, IPAs have been advised to start reporting of CP issuance data through NDS platform with effect from April 16, 2005. Also, with effect from July 1, 2005 the data on CP issuance are being made available on the Reserve Bank’s website.

IV.12 A Group was set up by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) at the instance of the Reserve Bank to recommend and standardise various market practices with a view to achieving settlement at least on a T+1 basis. The Group observed that while documentation and other market practices were already standardised by the FIMMDA, settlement of CP on T+1 basis could be achieved if funds settlement was ensured on a T+0 basis. It was recognised that this would be possible after full operationalisation of the Real Time Gross Settlement (RTGS) system.

IV.13 Issuers of CP are subject to stamp duty under the Indian Stamp Act, 1899, which is under the purview of the Central Government. As the stamp duty applicable was higher for non-bank entities as initial investors than for banks, the issuers of CP often sold their paper initially to banks, who in turn, offloaded them to non-bank investors, mostly mutual funds. In order to harmonise the stamp duty applicable on issuance of CP by bank and non-bank entities and to bring the Indian CP market closer to international standards, the Union Budget, 2005-06 rationalised the stamp duty such that it applies uniformly regardless of the initial class of investor.

IV.14 The Reserve Bank had set up a Group on Rupee Interest Rate Derivatives for harmonising the regulatory prescriptions for Over-the-Counter (OTC) and exchange-traded interest rate derivatives. The Group recommended that banks meeting a set of requirements, including adequate internal risk management, control systems and a robust operational framework could be allowed to run trading positions across various interest rate derivatives, including interest rate futures. Since banks are already permitted to undertake trading positions in the OTC segment in respect of Interest Rate Swaps (IRS)/ Forward Rate Agreements (FRAs), the requirements specified need to be adhered to by the banks already dealing in the IRS/ FRAs on a time-bound basis. Following discussions on the recommendations, the TAC appointed a SubGroup (Chairman: Shri D. N. Ghosh) to examine the harmonisation issues and suggest a road map for a more liberal participation by banks in interest rate futures.

IV.15 The OTC derivatives market has grown to an outstanding notional amount of over Rs.10,00,000 crore as at end-March 2005. In this context the need for the appropriate legal framework for removing legal ambiguity of derivative contracts is important. The Reserve Bank has made suggestions to the Central Government for appropriate legislative changes. The Union Budget, 2005-06 has also proposed steps for removal of legal ambiguity of OTC derivative contracts.

IV.16 The Reserve Bank stepped up efforts to further deepen and broaden the Government securities market during the year. The measures to improve functional efficiency through improved technological infrastructure were accompanied by an assessment of the risk management systems in place under the new institutional arrangements.

IV.17 The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 prohibits the Reserve Bank from participating in primary issuances of Government securities with effect from April 1, 2006, except under exceptional circumstances. Consequently, open market operations (OMOs) would become a more active policy instrument necessitating a review of processes and technological infrastructure consistent with market advancement. In order to address these emerging needs and equip the Reserve Bank as well as the market participants appropriately, an internal Technical Group on Central Government Securities Market was constituted. The recommendations of the Group include proposals to enlarge liquidity and improve pricing in the market, reorientation of PD system post-FRBM, standardisation of transactions in Government securities to T+1 basis, and allowing banks to carry out PD business departmentally. The recommendations of the Group relating to restructuring the underwriting obligations of PDs, allowing PDs exclusivity in primary auctions, introduction of ‘When Issued Market’ and short selling in Government securities would be considered in consultation with the Government.

IV.18 In the context of the FRBM Act, the Annual Policy Statement for the year 2005-06 had indicated reorientation of Government debt management operations while simultaneously strengthening monetary operations within the Reserve Bank with a view to moving towards functional separation between debt management and monetary operations. Accordingly, the Reser ve Bank constituted a new Financial Markets Department (FMD). The functions of the FMD would include: (i) monetary operations such as OMOs, LAF, standing liquidity facilities and Market Stabilisation Scheme (MSS), (ii) regulation and development of money market instruments such as call/notice/term money, market repo, CBLO, CP and CDs and (iii) monitoring of money, Government securities and foreign exchange markets. In due course, the functions of the Department would also cover the Reserve Bank’s operations in the domestic foreign exchange market to achieve the desired integration in the conduct of monetary operations.

IV.19 The Reserve Bank continued to diversify the products available in the Government securities market to meet the requirements of various classes of investors. In order to improve price discovery and secondary market trading in floating rate bonds (FRBs), a Sub-Group of the TAC (Chairman: Dr. Arvind Virmani) was constituted to examine issues of pricing, floating benchmark and liquidity.

IV.20 Market conventions for secondary market trading and settlement were finalised in consultation with the FIMMDA and Primary Dealers Association of India (PDAI) during the year. Suitable modifications carried out in the Public Debt Office (PDO)-NDS trading, clearing and settlement system are being tested. It is expected that Capital Indexed Bonds (CIBs) would be introduced during 2005-06 in consultation with the Central Government.

IV.21 Several initiatives were taken to develop the technological infrastructure for the efficient functioning of the Government securities market. The anonymous, order-driven trading in Government securities introduced in select stock exchanges in January 2003 has had limited success. A Working Group on Screen Based Trading in Government Securities (Chairman: Dr. R. H. Patil) recommended operationalisation of a screen-based trading system in the NDS. Accordingly, a screen based trading system was operationalised with effect from August 1, 2005 initially for the Reserve Bank regulated NDS members.

IV.22 Full-fledged functionalities relating to auctions of various kinds of Treasury Bills, including under the MSS and the LAF, are now run on-line on the PDO-NDS system. This provides for Straight Through Processing (STP) of bids submitted by member banks/PDs/financial institutions (FIs) and settlement of successful bids. During the year, changes relating to Treasury Bill auctions under the MSS and the revised LAF scheme were implemented. The revised LAF application provides flexibility to conduct repo/ reverse repo of varying maturities. The PDO-NDS system also provides for settlement of successful LAF bids in Repo Constituent Subsidiary General Ledger (SGL) accounts, which are handled by the Securities Section of the Mumbai Office of the Reserve Bank. A Primary Market Operations (PMO) module, covering functionalities relating to auctions of Government dated securities has been developed and operationalised.

IV.23 The Reserve Bank constituted a User Group to serve as a forum to exchange views on the operational aspects of the NDS on a continuous basis. Representatives are drawn from various NDS member groups comprising FIMMDA, PDAI, Association of Mutual Funds of India (AMFI) and CCIL and the Reserve Bank. The User Group held meetings on November 30, 2004 and April 21, 2005.

IV.24 The Government securities market used to follow both T+0 and T+1 settlements. In order to standardise trading procedures and help in better cash and risk management for participants, the Reserve Bank standardised the settlement system for transactions in Government securities to T+1 basis with effect from May 24, 2005.

IV.25 The Reserve Bank had set up a Group (Chairman: Dr. R.H. Patil) to examine the role of PDs in the Government securities market. The Report of the Group was discussed in the TAC. The recommendations are being examined for implementation. The Annual Policy Statement for 2005-06 has proposed that permitted structures of PD business could be expanded to include banks, which fulfil certain minimum criteria subject to safeguards, in consultation with banks, PDs and the Government.

IV.26 The Reserve Bank continued with its policy of liberalisation of external transactions with a view to deepening the foreign exchange market. Resident individuals were allowed a greater degree of freedom in terms of access to foreign exchange. Measures initiated in respect of corporates included liberalisation of norms relating to external commercial borrowings (ECBs) and dispensation of prior approval of the Reserve Bank for cross-border transfer of equity. Several measures were also undertaken to encourage exports, including overseas deployment of funds from the Exchange Earners’ Foreign Currency (EEFC) accounts. This was backed by steps to provide easier access to import financing, especially with the enlargement of limits of the authorised dealers (ADs) in respect of trade credits. Import of gold, especially for jewellery exports, has also been liberalised further. Benefits for non-resident Indians (NRIs) include easier access to housing loans for acquisition of property in India.

IV.27 The foreign exchange market has acquired a distinct vibrancy as evident from the range of products, participation, liquidity and turnover. In this context, the Reserve Bank set up a Technical Group on the Foreign Exchange Market to review comprehensively the initiatives taken by it in the foreign exchange market and identify areas for further improvements. The draft report of the Group has been placed on the Reserve Bank’s website for comments. Some of the recommendations have already been accepted for implementation in the Annual Policy Statement of 2005-06. Cancellation and rebooking of all eligible forward contracts booked by residents, irrespective of tenor, has been allowed. Banks are allowed to approve proposals for commodity hedging in international exchanges from their corporate customers. The closing time for inter-bank foreign exchange market in India has been extended by one hour up to 5.00 p.m. The Reserve Bank would disseminate additional information including traded volumes for derivatives such as foreign currency-rupee options to the market. Other recommendations relating to writing of covered options by corporates and hedging of economic risk of corporates in respect of their domestic operations arising out of changes in the landed cost of the imported substitutes of the commodities they consume/produce would be considered. The sequencing with regard to implementation of these measures would take into account the enabling conditions for further progress towards capital account convertibility, liberalisation in other sectors of the economy and the trend in overall balance of payments.

IV.28 The condition that shares should be offered at a concessional price for the acquisition of foreign securities by residents under the Employees Stock Option Plan (ESOP) was dispensed with, effective May 3, 2004. Shares acquired under the ESOP are allowed to be sold without obtaining prior permission of the Reserve Bank, provided the proceeds thereof are repatriated to India.

IV.29 Resident individuals were allowed, effective July 2004, to credit to the Resident Foreign Currency (RFC)/ RFC (Domestic) account of the beneficiary the foreign exchange received by them by way of the proceeds of life insurance policy claims/maturity/ surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business by the Insurance Regulatory and Development Authority (IRDA).

IV.30 Prior approval of the Reserve Bank was dispensed with and ADs were permitted to extend the enhanced facility of opening, holding and maintaining EEFC accounts. Individual professionals were permitted to keep up to 100 per cent of their foreign exchange earnings from consultancy and other sources rendered to persons or bodies outside India in their EEFC accounts. Furthermore, the EEFC account scheme was rationalised to only two categories, viz., i) 100 per cent of the foreign exchange earned can be retained by Status Holder Exporter/Resident Professionals/units in 100 per cent Export Oriented Units (EOUs)/Export Promotion Zones (EPZs)/Software Technology Parks (STPs)/ Electronic Hardware Technology Parks (EHTPs) and ii) up to 50 per cent by others (any other person resident in India).

IV.31 Effective October 1, 2004 the issue of ADR/ GDR-linked stock options by a listed company in the knowledge-based sectors is being governed by the SEBI (Employees Stock Option and Stock Purchase Scheme) Guidelines, 1999. The issue of ESOP by an unlisted company in such knowledge-based sectors shall continue to be governed by the guidelines issued by the Government of India for issue of ADR/GDR linked stock options to its employees. Therefore, ADs were permitted to make remittances up to US $ 50,000 or its equivalent in a block of five calendar years, without prior approval of the Reserve Bank, for purchase of foreign securities under the ADR/GDR linked ESOP Scheme.

IV.32 Effective October 1, 2004 general permission was granted for conversion of ECBs into equity, subject to certain conditions and prescribed reporting requirements. However, import payables deemed as ECBs would not be eligible for conversion into equity/ preference shares.

IV.33 The requirement of prior approval of the Reserve Bank for transfer of shares and convertible debentures (excluding financial services sector) was dispensed with from October 2004. General permission was granted subject to compliance of the terms and conditions and reporting requirements for the following categories: (i) transfer by a person resident in India to a person resident outside India and (ii) transfer by a person resident outside India to a person resident in India. The cases of increase in foreign equity participation by fresh issue of shares as well as conversion of preference shares into equity capital was put under general permission, provided such increase falls within the sectoral cap in relevant sectors and is within the automatic route.

IV.34 Non-government organisations (NGOs) engaged in micro finance activities were permitted to raise external commercial borrowings (ECBs) up to US $ 5 million during a financial year for permitted end-use under the automatic route, effective April 25, 2005. NGOs engaged in micro finance with a satisfactory borrowing relationship of three years with a bank and ‘fit and proper’ board/management committee would be eligible to avail ECBs. The designated AD would have to ensure that (a) the ECB proceeds are utilised for lending to self-help groups or for micro-credit or for bona fide micro finance activity including capacity building and (b) at the time of draw down, the foreign exchange exposure of the borrower is hedged. ECB funds should be routed through normal banking channels from internationally recognised sources, viz., international banks, multilateral financial institutions and export credit agencies. Furthermore, overseas organisations and individuals complying with Know Your Customer (KYC) guidelines and anti-money laundering safeguards may lend ECBs. All other ECB parameters such as minimum average maturity, all-in-cost ceilings, issuance of guarantee, choice of security, parking of proceeds, prepayment, refinancing and reporting arrangements under the Automatic Route should be complied with.

IV.35 Effective August 1, 2005, the Reserve Bank would consider under the Approval Route (i) ECBs with minimum average maturity of 5 years by NBFCs from recognised lenders to finance impor t of infrastructure equipment for leasing to infrastructure projects, (ii) Foreign Currency Convertible Bonds (FCCBs) by housing finance companies satisfying specific criteria and (iii) application for domestic rupee denominated structured obligations to be credit enhanced by international banks / international financial institutions / joint venture par tners. Furthermore, the limit for allowing prepayment of ECBs by ADs without prior approval of the Reserve Bank was raised to US $ 200 million from US $ 100 million, subject to compliance with minimum average maturity period for the loan.

IV.36 ADs were allowed to approve trade credits for imports into India up to US $ 20 million per import transaction with a maturity period of up to one year, effective April 2004. For import of capital goods, ADs were allowed to approve trade credits up to US $ 20 million per import transaction with a maturity period of more than one year and less than three years. No roll over/extension can be permitted by the ADs beyond the permissible period.

IV.37 The limit for outstanding forward contracts booked by importers/exporters, based on their past performance (i.e., without production of the underlying documents), was increased from 50 per cent to 100 per cent of the eligible limit from November 2004. However, the contracts booked in excess of 25 per cent of the eligible limits would be on a deliverable basis.

IV.38 All status holder exporters are permitted a period of 12 months for realisation and repatriation of export proceeds. This facility was extended to 100 per cent EOUs and units set up under EHTPs, STPs and Bio-Technology Parks (BTPs) schemes from November 2004.

IV.39 As per the extant guidelines, only nominated agencies, approved banks and EOUs/SEZ units in the gems and jewellery sector can directly import gold. Accordingly, ADs were permitted to open letters of credit (LCs) and allow remittances on behalf of EOUs, units in SEZs in the gems and jewellery sector and nominated agencies, for direct import of gold, from July 2004, subject to certain conditions. ADs would also need to ensure that due diligence is undertaken and all KYC norms and the Anti-Money Laundering guidelines issued by the Reserve Bank are adhered to while undertaking such transactions.

IV.40 ADs were granted general permission from November 2004 to issue guarantees, letters of comfort and letters of undertaking in favour of overseas suppliers or banks for their importer clients up to US

$ 20 million per transaction for a period up to one year for import of all non-capital goods permissible under the Foreign Trade Policy (except gold) and up to three years for import of capital goods, subject to prudential guidelines.

IV.41 As per the existing guidelines, nominated agencies/approved banks can import gold on loan basis for on-lending to exporters of jewellery and by EOUs and units in SEZs for manufacturing and export of jewellery on their own account only. The maximum tenor of gold loan was enhanced to 240 days, i.e., 60 days for manufacture and exports and 180 days for fixing the price and repayment from February 2005. ADs are permitted to open standby LCs for tenor equivalent to the loan period and on behalf of entities permitted to import gold. The standby LC should be in favour of internationally renowned bullion banks only.

IV.42 An employee or a director of an Indian office or branch or a subsidiary of a foreign company in India or of an Indian company in which the foreign holding is not less than 51 per cent can purchase shares under ESOP offered by a foreign company even if it is an indirect shareholding (through a holding company or a Special Purpose Vehicle (SPV) in third country) in the Indian company, effective February 9, 2005.

IV.43 With a view to promoting Indian investment abroad and to enable Indian companies to reap the benefits of globalisation, it was decided to raise the ceiling on overseas investment from 100 per cent of the investing company’s net worth to 200 per cent as on the date of last audited balance sheet. The enhanced ceiling is not applicable to the investments made out of balances held in EEFC accounts and out of the proceeds of ADR/GDR issues.

IV.44 ADs or housing finance institutions in India approved by the National Housing Bank were allowed to provide housing loans to a non-resident Indian or a person of Indian origin resident outside India for acquisition of a residential accommodation in India. From May 2004 the instalment on such loans, interest and other charges can be repaid by close relatives (as defined under Section 6 of the Companies Act, 1956) of the borrower in India directly to the borrower’s loan account with the AD/housing finance institution.

IV.45 Banks authorised to deal in foreign exchange are permitted to allow a resident power of attorney holder to remit funds out of the balances in the NRE/ FCNR(B) account through normal banking channels to the non-resident account holder only, provided specific powers for the purpose have been given. Deposits by NRIs with persons other than ADs/ authorised banks out of inward remittances from overseas or by debit to NRE/FCNR(B) accounts are prohibited. However, such deposits by debit to NRO accounts have been permitted to continue, provided that the amount deposited with such entities does not represent inward remittances or transfer from NRE/ FCNR(B) accounts into the NRO accounts.

IV.46 Insurance companies incorporated outside India, which have obtained prior approval from the IRDA, were granted general permission to establish Liaison Offices in India from April 2005 under conditions specified by the IRDA.

IV.47 The Government reviewed the procedures for compounding of contravention under the Foreign Exchange Management Act (FEMA), 1999 in consultation with the Reserve Bank. With a view to providing comfort to the citizens and the corporate community by minimising transaction costs, the responsibilities of administering compounding of contravention cases under the FEMA were vested with the Reserve Bank with exception of clause (a) of Section 3 of the FEMA, 1999 which deals essentially with hawala transactions. The Reserve Bank has issued directions to ADs operationalising the revised procedures for compounding of contravention under the FEMA. An application for compounding in prescribed form with necessary fee may be submitted to the Compounding Authority (CA) either on being advised of a contravention under the FEMA or suo moto on becoming aware of the contravention. On receipt of the application for compounding of contravention, the compounding proceedings would be initiated in accordance with the compounding rules. This process would be concluded by the CA within 180 days from the date of the receipt of the application for compounding. The compounding order would be passed after affording an opportunity to the contravener and all other concerned to be heard. Once a contravention has been compounded by the CA, no proceeding or further proceeding will be initiated or continued, against the contravener.

IV.48 To sum up, the Reserve Bank continued with its efforts to increase the depth and width of the various segments of the financial market during 2004-05 with a view to enhancing allocative efficiency and ensuring financial stability. Notably, the process of converting the call money market into a pure inter-bank market was completed by August 2005. A series of measures in the foreign exchange market were aimed at further liberalisation of the current and capital account transactions. In the Government securities market, efforts continued towards improving the technological infrastructure. In the context of the FRBM Act 2003 and with a view to moving towards functional separation between debt management and monetary operations, the Reserve Bank initiated attempts to restructure/reorient the PD system. The Reserve Bank will pursue its efforts to further develop, integrate and provide vibrancy to the various segments of the financial markets.