Delving on the factors on which monetary policy has to depend on, the RBI annual report has said that given the large borrowing programme of the government and the present level of development of financial markets in India, the monetary policy will have to depend on a large set of instruments -- both direct and indirect -- to exercise sufficient control over market developments.

It added that the policy also has to focus on such instruments that could be of particular significance for the movement of long-term interest rates. "Accordingly, the liquidity management strategy was combined with an active interest rate policy directed at stabilising or reducing the interest rates thatinfluence investment," the report said. The liquidity management strategy put in place was through an active use of fixed rate repo operations, refinance window, cash reserve ratio and the techniques of private placement of government securities combined with open market operations.

In order to influence the long-term interest rate, the Reserve Bank made use of the bank rate which is an important interest rate to transmit the signals of monetary policy. The bank rate was revised downwards and was supplemented by the central bank's efforts to soften the medium- and long-term government security rates through direct devolvement or private placement, combined with open market operations (OMOs).

"As a result of of the pursuit of liquidity management with an active interest rate policy, the movements in the short-term and long-term interest rates helped to meet both the short-term market stabilisation objective and the long term objective of growth," the annual report pointed out.