call money markets

8/12/2019 Call Money Markets

1/7

Call Money Markets

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds(mostly ofbanks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lentfor one day in this

market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as"Notice Money". TermMoney refers to Money lent for 15 days or more in the InterBank Market.

Banks borrow in this money market for the following purpose:

To fill the gaps or temporary mismatches in funds

To meet the CRR & SLR mandatory requirements as stipulated by the Central bank

To meet sudden demand for funds arising out of large outflows.

Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Call Money Market Participants :

1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

Reserve Bank of India has framed a time schedule to phase out the second category out of Call MoneyMarket andmake Call Money market as exclusive market for Bank/s & PD/s.

************************************************** ******The most active segment of the money market has been the call money market, where the day to day

imbalances in the fundsposition of scheduled commercial banks are eased out. The call notice money market has graduated into abroad and vibrantinstitution .

Call/Notice money is the money borrowed or lent on demand for a very short period. When money isborrowed or lent for aday, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for thispurpose. Thus money,borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays)is "Call Money".When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateralsecurity is required

to cover these transactions.

The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers areallowed toborrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specifiedentities areallowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently takensteps to make thecall/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed


2/7

access to this marketbeyond December 31, 2000.

From May 1, 1989, the interest rates in the call and the notice money market are market determined.Interest rates in thismarket are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have

moved from a low of 1- 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also notuncommon. Hence there isa high degree of interest rate risk for participants. In view of the short tenure of such transactions, both theborrowers and thelenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick andtimely debit andcredit operations. The call market enables the banks and institutions to even out their day to day deficitsand surpluses ofmoney. Banks especially access the call market to borrow/lend money for adjusting their cash reserverequirements (CRR).The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deployingfunds on short term

basis.

************************************************** *****The overnight call money or the inter-bank money market rate is presumably the most closely watchedvariable in day-to-dayconduct of monetary operations and often serves as an operating target for policy purposes. The choice ofoperating tacticsfrom quantity to rate based targeting, following the IS/LM based analysis of Poole (1970), has been largelyaccepted in favourof interest rate targeting, because of the diminished link between monetary aggregates and economicobjectives of monetarypolicy as a result of the fast pace of financial innovations. Most central banks, therefore, presently useindirect instruments in

an attempt to maintain the short term interest rate at a desirable level with the use of appropriate liquiditymanagementpractices. The most common of these instruments of liquidity management is the central banks repo facilitywhich enablesmodulation of the marginal liquidity on a day to day basis so as to ensure stable conditions in the moneymarket and,particularly, to maintain the short term money market rate as close as possible to the official/policy rate.Changes in theshort-term policy rate made by central banks provide signals to markets, and various segments of thefinancial system,therefore, respond by adjusting interest rates/returns depending on their sensitivity and the efficacy of thetransmissionmechanism. Economic implications for investment and spending decisions of producers and households

follow as usual,thereby affecting the working of the real sector viz., changing aggregate demand and supply, and eventuallyinflation andgrowth in the economy. It is, therefore, clear that the interest rate stance of a central bank and itsimplications for economicactivity and inflation play an important role in the conduct of monetary policy.The objective of the paper is, therefore, to assess the volatility pattern of the call money rate in India duringthe last threeyears and to estimate its sensitivity vis-- vis the Reserve Bank of Indias liquidity adjustment facility (LAF)


3/7

auction decisionsfor the purpose of eliciting underlying market characteristics. Attempt is made to provide evidence, albeitindirectly, on howregulatory changes related to other instruments in the money market may have affected the functioning ofthe interbank callmoney market. Finally, some evidence is also offered on the link between money market volatility and

interest sensitivefinancial markets, particularly the government securities market.The remainder of the paper is structured as follows. Section I provides an overview of liquidity managementin India whilecross-country experience is set out in Section II. Data used in the analysis are explained in Section III.Methodology used andthe empirical analysis are presented in Section IV and concluding observations are given in Section V.

************************************************** *****THERE seems to be a role reversal of sorts in the inter-bank call money market. Excepting a few big fish,mostnationalised banks, traditionally lenders in the overnight lending and borrowing market, have turned

borrowers.

With a large portion of their funds locked in government securities, many public-sector banks are now facingdearth of liquidityin patches, say bankers.

" We have even borrowed up to Rs 600-700 crore on a particular day'', said an official in a public-sectorbanker.

The increased demand for funds seems to be due to a combination of factors - - a pick-up in credit disbursalwitnessed overthe past month, being the prominent among them. Other requirements are more routine needs such asfulfilment of statutory

norms, the cash reserve requirement, deposit redemption and asset-liability management of these banks.

" With demand for large funds coming from the oil sector over the past 6-8 weeks, we have been resortingto borrowing in thecall money market as a stop-gap arrangement for funding needs,'' confided the treasury head of a public-sector bank. Therates in the call money market had been low and `attractive' in the 5.50-5.60 per cent range, much lowerthan the average costof funds at 6.75 per cent, he added.

Public-sector banks are locked into their holdings in government securities at the moment. Said the treasuryhead of anationalised bank: "We had bought these g-secs at higher prices and therefore it does not make sense to

sell them now andbook losses when the market is dull.''

With prices dropping in the g-secs market over the past fortnight as much as Rs 5-10, public sector banksare sitting ondepreciation in the value of their holding. On an average 40-45 per cent of most nationalised banks' balancesheets wereinvested in zero-risk' government securities, said a debt market analyst. However, the liquidity in thesystem has not vanished


4/7

over-night. Bankers are keeping their fingers crossed with the hope that g-sec prices will rise once again onquelling oftensions in West Asia.

If and when g-sec prices rise again, the banks can sell their stocks, realise funds plus book profits.

Meanwhile, there have also been some unusual lenders in the call money market which include private-sector banks, who areby nature borrowers. "Having sold our positions in g-secs over the past fortnight, we are now sitting on potsof cash, whichhave to be lent out,'' said the trading head of a private sector.

************************************************** *********

Call money rates ruled at around 7.75-8% last week. Demand remained modest despite a scheduled auctionof Rs 5,000crore and was adequately matched by available supplies. Consequently, call rates were steady.

Also, as liquidity was aid ed by RBIs reported intervention in the forex market (buying dollars), inter -bank

rates remainedsupported at around the current levels.

The average repo numbers at the liquidity adjustment facility window stood at Rs 12,149 crore against Rs13,332 crorepreviously, while the average reverse repo figure was up at Rs 210 crore against Rs 171 crore of theprevious week.The cumulative collateralised borrowing and lending obligation volumes for the week fell to Rs 72,994 crorefrom Rs 97,246crore.

The overnight weighted average yield was lower at 7.2366% against 7.2439% in the previous week. Inter-bank rates would

re-align in case RBI tightens rates in the policy review.

************************************************** ***********

Rates on the call money market ended in a range of 7.7-7.9%, down from the previous closing levels of 7.8-8%. RBI moppedup bids worth only Rs 210 crore through the reverse repo operations at the second session of liquidityadjustment.

On the other hand, the central bank infused funds worth Rs 12,115 crore through the repo operations underboth sessions. Thebond market did witness some improvement in volumes on Tuesday, while prices rose by almost 20 paise.

Traders expected the inflation to soften in the weeks ahead, and interest rates to rise at a slower pace, afterthe governmentcut import duty on some items. The yield on the benchmark 8.07% 2017 bond ended at 7.87%, lower thanthe previous closeof 7.9%.

Traders widely expect a 25 basis point increase in interest rates when RBI announces its quarterly policyreview on January


5/7

31.

The government reduced import duties on a variety of items late on Monday after annual inflation hit a two-year high of 6.12%,breaking above the central banks estimate of 5 -5.5% at March-end.

******************************

Operations in Call Market

Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-the-

telephone market. After negotiations over the phone, the borrowers and lenders arrive at a deal specifying the

amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favour of the

borrower. The borrower is turn issues call money borrowing receipt. When the loan is repaid with interest, the

lender returns the lender the duly discharges receipt.

Instead of negotiating the deal directly, it can be routed through the Discount and Finance House of India

(DFHI), the borrowers and lenders inform the DFHI about their fund requirement and availability at a specified

rate of interest. Once the deal is confirmed, the Deal settlement advice is lender and receives RBI cheque for

the money borrowed. The reverse is taking place in the case of landings by the DFHI. The duly discharged call

deposit receipt is surrendered at the time of settlement. Call loans can be renewed on the back of the deposit

receipt by the borrower.

Call loan market transitions and participants

In India, call loans are given for the following purposes:

1. To commercial banks to meet large payments, large remittances to maintain liquidity with the RBI and

so on.

2. To the stock brokers and speculators to deal in stock exchanges and bullion markets.

3. To the bill market for meeting matures bills.

4. To the Discount and Finance House of India and the Securities Trading Corporation of India to

activate the call market.

5. To individuals of very high status for trade purposes to save interest on O.D or cash credit.

The participants in this market can be classified into categories viz.

1. Those permitted to act as both lenders and borrowers of call loans.


6/7


7/7

Uneven Development : The call market in India is confined to only big industrial and commercial centers

like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated

with stock exchanges. Hence the market is not evenly development.

Lack Of Integration : The call markets in different centers are not fully integrated. Besides, a largenumber of local call markets exist without an\y integration.

Volatility In Call Money Rates : Another drawback is the volatile nature of the call money rates. Call

rates very to greater extant indifferent centers indifferent seasons on different days within a fortnight. The

rates very between 12% and 85%. One can not believe 85% being charged on call loans.******************** ****************

call money markets

Documents