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Call money market is a market for very short term funds repayable on demand with maturity period varying between one day to a fortnight.

Until march 1978,transaction in the call money market were usually effected through brokers.

RBI has prohibited banks paying brokerage on operations in the call money market.

The seasonal nature of the call money market would be reflected in two indicators:

1. A decline in money at call and short notice should be greater in the slack season than in the busy season of the given year.

2. An increase in money at call and short notice should be greater in busy season than the slack season.

The need for call money borrowings is the highest around march every year-

1.withdrawals of deposits in march to meet year end tax payments.

2.withdrwal of funds by financial institutions to meet their statutory obligations.

Call money borrowings tend to increase when there is an increase in CRR.

 Call Money" means deals in overnight funds  "Notice Money" means deals in funds for

Call Money" means deals in overnight funds

"Notice Money" means deals in funds for 2 - 14 days

"Fortnight" shall be on a reporting Friday basis and

mean the period from Saturday to the second following Friday, both days inclusive "Bank” or “banking company" means a banking company or a "corresponding new bank", "State Bank of India" or "subsidiary bank“ and includes a "co-operative bank"

 “Scheduled bank” means a bank included in the Second Schedule of the Reserve Bank of

“Scheduled bank” means a bank included in the Second Schedule of the Reserve Bank of India Act, 1934

"Primary Dealer" means a financial institution which holds a valid letter of authorization as a Primary Dealer issued by the Reserve Bank, in terms of the "Guidelines for Primary Dealers in Government Securities Market“

"Capital Funds" means the sum of the Tier I and Tier II capital as disclosed in the latest audited balance sheet of the entity

 As per RBI definitions “ A market for short terms financial assets that are close

As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.

The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

Commercial banks and co operative banks are the participants

LIC, GIC, UTI direct participants. Indirect participants -IDBI,IFC,ICICI. Located in big industrial and commercial centers like Mumbai, Chennai, Calcutta, Delhi etc

Market has expanded small banks and nonscheduled banks also participate in this market.

Participation of foreign banks as borrower has increased to meet CRR requirements.

After 1970 SBI has been regularly participating in this market, a major lender but a small borrower.

As per latest RBI policy LIC,UTI,GIC,IDBI, and NABARAD are allowed to participate as lenders and not as borrowers.

In APRIL 1991 RBI announced that lenders should provide evidence to RBI about-bulk lend able resources and no outstanding borrowings from banks.

They will be required to observe a minimum size of operations of Rs 20 Cr per transactions.

Participate with prior permission of RBI and only through DFHI.

RBI has permitted four primary dealers to participate as both lenders and borrowers.

Mutual funds as lenders.

Located in big industrial and commercial centers like Mumbai, Chennai, Calcutta, Delhi etc

There are large number of local call markets developed and operated by indigenous local bankers.

 Market for very short term funds, known as money on call  The rate at

Market for very short term funds, known as money on call

The rate at which funds are borrowed in this market is called `Call Money rate'

The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million

Of which public sector banks account for 80% of borrowings

Foreign banks/private sector banks account for the balance 20%

Total call loans in India increased from Rs 9.3 Cr in 1955-56 to Rs 7,147 Cr in 1995-96 and to Rs 36093 Cr in 2003.

Total turnover (borrowings) in the following

years: years

1991-92

1993-94

1994-95

1995-96

Rs. (in Billion)

16,450

22,510

17,030

20,980

The daily average borrowings by all banks and PDs were Rs 9,465 Cr in 1996 and Rs 10,203 Cr in 1997.

Foreign banks daily average Borrowings

were Rs 2,531 Cr in 1996 and Rs 3,807 in

1997.

The cumulative turnover (borrowings and landings) was Rs 1,499 billion in 1995-96 and Rs 2,743 billion in 1996-97

 Large borrowings by banks to meet CRR requirements.  Credit operations of certain banks tend

Large borrowings by banks to meet CRR requirements.

Credit operations of certain banks tend to be much higher than their resources.

Occasional factors in the market.

Withdrawal of funds by corporate for business needs and payment of advance tax.

Liquidity crisis and illiquidity of money.

In US there are two markets which can be said to form the call money markets:

Federal funds market: Transactions between banks involving borrowing or lending of banks deposits at federal reserve banks for one day at a specified rate of interest.

Call money market proper: The call loans represent short term loans by banks to security brokers and dealers for the purpose of financing their customers to purchase common stock.

In UK the call money market consist of three parts:

Clearing banks loans to discount houses Inter bank loans Mobilization of surplus money by discount houses among themselves before they approach the bank of England for financial accommodation.

(Existence of an intermediary in the form of discount houses in between Bank of England and commercial banks is a peculiar feature of British money market)

 The size of call market in India has been much smaller than that of the

The size of call market in India has been much smaller than that of the US and UK because of some factors:

  • - The bill market in India is underdeveloped.

  • - Unlike in the UK, discounting facilities available to banks in India.

  • - Loans to security lenders can not be large.

  • - Indian commercial banks hold fairly large cash reserves.

 Borrowers and lenders contact each other over telephone.  The borrowers and lenders arrive at

Borrowers and lenders contact each other over telephone.

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 in turn issues call money borrowing receipt.

When the loan is repaid with interest, the lender returns the duly discharged receipt

 The deal can be directly negotiated by routing it through the Discount and Finance House
The deal can be directly negotiated by routing it 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 exchanged.

In case the DFHI borrows, it issues a call deposit receipt to the lender and receives RBI cheque for the money borrowed. The reverse takes place in the case of lendings by the DFHI.

The duly discharged call deposit receipt is surrendered at the time of settlement.

Call loans can be renewed upto a maximum period of 14 days only and such renewals are recorded on the back of the deposit receipt by the borrower

Treasury Bills are money market instruments to finance the short term requirements of the Government of India.

These are discounted securities and thus are issued at a discount to face value.

The return to the investor is the difference between the maturity value and issue price.

 Types of Treasury bills based on the maturity period and utility of the issuance like,

Types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 12months Treasury bills etc. In India, at present, the Treasury Bills are the 91-days 182 days and 364-days Treasury bills.

 T-bills are sold through an auction process announced by the RBI at a discount to

T-bills are sold through an auction process announced by the RBI at a discount to its face value. RBI issues a calendar of T-bill auctions

It also announces the exact dates of auction, the amount to be auctioned and payment dates. T-bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs.

25,000.

Banks and PDs are major bidders in the T-bill market.

Both discriminatory and uniform price auction methods are used in issuance of T-bills.

    Currently, the auctions of all T-bills are multiple/discriminatory price auctions, where the

Currently, the auctions of all T-bills are multiple/discriminatory price auctions, where the successful bidders have to pay the prices they have actually bid for.

Non-competitive bids, where bidders need not quote the rate of yield at which they desire to buy these T-bills, are also allowed from provident funds and other investors.

RBI allots bids to the non-competitive bidders at the weighted average yield arrived at on the basis of the yields quoted by accepted competitive bids at the auction.

Allocations to non-competitive bidders are outside the amount notified for sale. Noncompetitive bidders therefore do not face any uncertainty in purchasing the desired amount of T-bills from the auctions.

No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradability and active secondary market facilitates meeting unplanned fund requirements.

 Market related yields Ideal matching for funds management particularly for short term tenors of less

Market related yields Ideal matching for funds management particularly for short term tenors of less than 15 days. Transparency in operations as the transactions would be put through Reserve Bank of India’s SGL (subsidiary general ledger) or Client’s Gilt account only Two way quotes offered by primary dealers for purchase and sale of treasury bills. Certainty in terms of availability, entry & exit

The auction of treasury bills is done only at Reserve Bank of India, Mumbai.
The auction of treasury bills is done only at Reserve Bank
of India, Mumbai.

Bids are to be submitted on NDS (Negotiable Dealing System) by 2:30 PM on Wednesday. If Wednesday happens to be a holiday then bids are to submitted on Tuesday.

Bids are submitted in terms of price per Rs 100. For example, a bid for 91-day Treasury bill auction could be for Rs 97.50.

Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day.

Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.

 Multiple Price Based or French Auction  Uniform Price Based or Dutch auction

Multiple Price Based or French Auction

Uniform Price Based or Dutch auction

 Scheduled banks,  Financial Institutions,  Primary dealers,  Mutual funds,  Insurance companies and

Scheduled banks, Financial Institutions, Primary dealers, Mutual funds, Insurance companies and Corporate treasuries

 T-bills are issued at a discount and are redeemed at par. The implicit yield in

T-bills are issued at a discount and are redeemed at par. The implicit yield in the T- bill is the rate at which the issue price (which is the cut-off price in the auction) has to be compounded, for the number of days to maturity, to equal the maturity value.

Yield, given price, is computed using the formula:

= ((100-Price)*365)/ (Price * No of days to maturity)

 Similarly, price can be computed, given yield, using the formula:  = 100/(1+(yield% * (No

Similarly, price can be computed, given yield, using the formula:

= 100/(1+(yield% * (No of days to

maturity/365))

 A treasury bill maturing on 28-Jun- 2002 is trading in the market on 3- Jul-2001

A treasury bill maturing on 28-Jun- 2002 is trading in the market on 3- Jul-2001 at a price of Rs. 92.8918. What is the discount rate inherent in this price?

2. What is the price at which a treasury bill maturing on 23rd March 2002 would be valued on July 13, 2001 at a yield of 6.8204%?