call money market (1)

8/13/2019 Call Money Market (1)

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Call money market&

its development in india

BY

DIVYA SABHARWAL

EKTA SINGH

GAUTAM LADHA

GOUTAM BAID

ISSU AGARWAL


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CALL MONEY MARKET Money is transacted on an overnight basis.

The main purpose is:

To fill the gap or mismatch of funds.To meet the mandatory CRR and SLR requirements.

To meet contingency needs.


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ParticipantsBorrowers Lenders

Scheduled Commercial Banks

(excluding RRBs)

Co-operative Banks

Primary Dealers (PDs)

Scheduled Commercial Banks

(excluding RRBs)

Co-operative Banks

Primary Dealers (PDs)

Select all-India Financial

Institutions

Select Insurance CompaniesSelect Mutual Funds


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Prudential LimitsSr.

No.

Participant Borrowing Lending

1 Scheduled Commercial Banks On a fortnightly average basis,

borrowing outstanding should not

exceed 100 per cent of capital

funds.

On a fortnightly average basis,

lending outstanding should not

exceed 25 per cent of their capital

funds.

2 Co-operative Banks Outstanding borrowings of State

Co-operative Banks in call/noticemoney market, on a daily basis

should not exceed 2.0 per cent of

their aggregate deposits as at end

March of the previous financial

year.

No limit.

3 PDs PDs are allowed to borrow, on

average in a reporting fortnight, up

to 225 per cent of their net owned

funds (NOF) as at end-March of

the previous financial year.

PDs are allowed to lend in call/notice

money market, on average in a

reporting fortnight, up to 25 per cent

of their NOF.


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Interest Rate. Eligible participants are free to decide on interest rates in call/notice money market.

. Calculation of interest payable would be based on the methodology given in theHandbook of Market Practices brought out by the Fixed Income Money Market and

Derivatives Association of India (FIMMDA).

Dealing SessionDeals in the Call/Notice/Term money market can be done from 9:00 am to 5:00 pm

on weekdays and from 9:00 am to 2:00 pm on Saturdays or as specified by RBI

from time to time.

DocumentationEligible participants may adopt the documentation suggested by FIMMDA from

time to time.


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Reporting Requirement With the implementation of the core banking solution, the Negotiated

Dealing System (NDS) has been discontinued for reporting of OTC

Call/Notice/Term Money transactions.

All dealings in Call/Notice/Term money on the Negotiated DealingSystem-Call, i.e. NDS-Call (a screen based, negotiated, quote-drivensystem), do not require separate reporting.

It is mandatory that all the OTC Call/Notice/Term money deals bereported over the reporting platform of NDS-Call by the parties who arehaving NDS-Call membership.

Such OTC deals should be reported within 15 minutes on NDS-Callreporting platform, irrespective of the size of the deal or whether thecounterparty is a member of the NDS-Call or not.


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Parties who are not having NDS-Call membership are advised to

report the deals to Financial Markets Department,

The reporting time for all OTC Call/Notice/Term money deals on

NDS-Call is up to 5:00 pm on weekdays and 2:00 pm on Saturdays

or as decided by RBI from time to time.

In case of any misreporting or repeated reporting of OTC deals by a

party, the same should be immediately brought to the notice of

FMD either through e-mail or through fax.

In case the situation so warrants, the Reserve Bank may call for

information in respect of money market transactions of eligible

participants by fax.


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Indian Call Markets in Pre-liberalization Period

It was a restricted market & the entry into the market was tightly

regulated

Lacked an active market as there were few lenders and a largenumber of borrowers

The market was considerably organized with a large part of the

dealings taking place in Mumbai and Kolkata

Seasonal fluctuations were reflected in the volume of money at

call and short-notice


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Large borrowings by banks to meet the CRR requirements

Banks dependence on call market due to over extension of

loans in excess of their own resources

Withdrawal of funds by institutional lenders and

payments of taxes by corporate sectors

Liquidity crisis or illiquidity in the money markets


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ENTRY OF INSTITUTIONS TO ACTIVATE MARKET

The entry of SBI, UTI and LIC, as lenders, has pumped the

funds, which activated the call market

Up to December, 1973, there was no ceiling on the call money

rate

After observing the high rates for relatively prolonged periods,

the Indian Banks Association (IBA) intervened and fixed a

ceiling of 15% on the call money rates. Remained at 10 % till

1988.


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Early Liberalization Scenario

Two committees were set-up to review the working of the Monetary System and

Money Market, which provided fresh insights to improve the working of the callmoney market.

1) In 1985, the Sukhamoy Chakravarthy Committee

2) In 1987, the Vaghul Committee

The RBI had taken few steps following the Vaghul Committee recommendations: In May, 1988, the interbank rates both on the call money and term money were

freed/deregulated.

In October, 1988, Discount and Finance House of India (DFHI) was set-up. It

was permitted to borrow/lend and also arrange funds in the call money market.Later, it merged with SBI and has become SBI-DFHI.

In May 1990, the RBI allowed all the financial institutions such as GIC, IDBIand NABARD, etc., to operate as lenders in the overnight call and notice moneymarket.


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In April, 1991, the RBI permitted corporate entity with surplus lendable resources

to access the call money through the SBI-DFHI. It set a minimum size of Rs.5

crore for each transaction and, further, the lender had to give an undertaking thathe had no outstanding loans from the banking sector to operate in this market.

The entry of financial institutions, permitting of public sector and private sector

mutual funds, money market mutual funds, primary dealers and others into the

market, channelized the funds flow into call markets, thereby reducing thedemand-supply gap in the recent years.

The few significant changes initiated by the Central Bank brought greater

integration of the various segments of the money market. The base of call market

has been widened by selective increase in the participants as lenders, especially,led to an increase in supply of funds in the call money market. The entry of SBI-

DFHI and STCI and primary/satellite dealers promoted an orderly development

of the call market.


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Volume of Activity in the Call Market The volume of activity and the size of the call money market in

India can be assessed by looking at the turnover of the market.Looking at the call market turnover it can be said that size appears

to be very large considering the basic objective of the call market,

which is to offset the momentary imbalances in the banking sector.

The average daily turnover (borrowings) of the call markets as on

the fortnight ended March 29, 1996 was Rs.9,465 crore and

Rs.18,941 crore during fortnight ended 15th October, 2004 and

Rs.24,562 crore for the week ended November 11, 2005.

Size of the Indian call market is less developed as compared to the

American and UK markets.

A critical view of the call market holds is that the lenders areless and borrowers are many


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SOURCES

http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8170

http://www.fimmda.org/ http://en.wikipedia.org/wiki/Money_market_in_India
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8170http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8170http://www.fimmda.org/http://en.wikipedia.org/wiki/Money_market_in_Indiahttp://en.wikipedia.org/wiki/Money_market_in_Indiahttp://www.fimmda.org/http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8170http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8170

call money market (1)

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