The market, which is still in the early stages of development, suffers from several deficiencies. Unlike developed markets where transactions are financially driven, our market is dominated by merchant flows. There is lack of depth and liquidity in the Spot as well as Forward Markets. The forward rates reflect demand and supply rather than interest rate differentials due to the absence of integration between the money and forex markets and restrictions placed on borrowing/ lending in the international market as well as on running overdrafts in the Nostro accounts for periods beyond five days. On account of ceilings on open position and gaps, there is a virtual absence of market making and position trading ....... (Some major mind-set changes have taken place in the Credit Policy dated April 15, 1997, which should considerably ease these constraints)

Measures are therefore called for to strengthen the institutional framework of the forex market by making it more competitive, improving market making, expanding geographical coverage and strengthening financial linkages.

On the Debt Market

Subjecting inter - bank liabilities (including CDs and Deposits) to CRR has deterred the emergence of a deep and liquid term money market in India as the surpluses and deficits tend to get equilibrated at the very short end, resulting in high volatility of the "Call" market and all interbank activity getting restricted to 13 days. The absence of such a market inhibits the RBI from using the market to transmit signals relating to its interest rate policy. It also results in difficulties in banks managing their asset - liability mismatches and hedging their interest risk.

It is recommended that CRR requirements on net Inter - bank liabilities be removed to foster the development of a term money market. This would no doubt imply that inter - bank assets cannot be offset for purposes of reserve requirements. However, as observed, the netting concept is not significant at the level of the individual banks where net inter - bank assets are more than inter - bank liabilities, as in such cases inter - bank liabilities are treated as zero rather than negative. Once the reserve requirement is removed, participants other than commercial banks may also be allowed to access the market for borrowings. This recommendation has been accepted vide the Credit Policy dated April 15, 1997.