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Call Money Market

Call Money Market
• Definition:
Call Money market is that part of the
national money market where the dayto-day surplus funds, mostly of banks,
are traded in.

• Highly liquid: liquidity exceeded only by cash. . • Short maturity: 1 day to a fortnight.Features of Call Money Market • Repayable by demand: option of either borrower or lender.

1. Reason for supply of funds: Excess reserves than required. Reason for demand of funds: Member banks may have reserve deficits on that day.CMM in US and UK • In US: 1. 2. . Federal Funds Market: Transactions between member banks and Federal Bank at a specified interest rate.

Call Money Market Proper: shortterm loans by banks to security brokers and dealers for financing customer purchase of common stock. In short: It’s an inter-bank call market. 1. .CMM in US and UK 1.

3. Clearing Bank’s Loans to Discount Houses. 2. . Discount Houses as intermediaries before approaching the Bank of England for financial accommodation.CMM in US and UK • In UK: 1. Inter-bank Call Market.

– Between banks.CMM in India • Call loans in India are given: – To the bill market. (most significant) – Frequently to high net-worth individuals in Mumbai for ordinary trade purposes to save interest in cash credits and overdrafts. . – For the purpose of dealing in the commodity and the stock market.

CMM in India • Unlike in other countries though. call loans in India are unsecured because the credit situation in India is seasonal. . Major indicators: – Decline in call/short notice is greater in the slack season more than the busy season. • Highest increase is seen in March due to tax withdrawals to meet year-end payments. – Increase in call/short notice is greater in the busy season more than the slack season.

– State.Participation • Participants in the CMM in India are: – Scheduled and non-scheduled commercial banks. cooperative banks. – Discount and Finance House of India (DFHI). . – Securities Trading Corporation of India (STCI). – Foreign banks. district and urban.

IDBI and NABARD are allowed to be lenders and not borrowers. LIC. and only through DFHI. • They can participate with prior permission from the RBI. . 20 crore per transaction. GIC. • They require a minimum size operation of Rs.• As per the latest RBI policy. UTI.

. • The average total turnover in the call money market increased from Rs. 21725 crore during 2006-2007.Size of CMM • The size of the CMM can be gauged with the help of information on the total turnover (borrowings) in the market. 17979 crore during 2005-2006 to Rs. 14170 crore during 2004-2005 to Rs.

. – Direct discounting facilities are available to banks as a result of which. Major factors being: – The bill market in India is underdeveloped. the demand for call loans decreases (unlike the UK). The volume of industrial securities traded in India is also small (unlike the US). so the call loans to the bill market are small. banks in India are not inclined to give loans to brokers and security dealers. – Loans to security dealers cannot be large due to certain reasons.Size of Indian CMM vis-à-vis US and UK • It has been smaller. In addition.

March and June when the quarterly advance taxes are due.Variation of Demand and Supply of Call Loans • Call loans are one of the avenues of investment and the supply of call loans would increase with increase in bank deposits. . • Demand also broadens in December. • The demand depends upon the buoyancy of the stock market and increase in demand for industrial loans.

i. . • The pressure on the market. Fridays also influences the demand for call loans as there is a scramble for funds to make up the shortfall of required reserves. makes banks operate in CMM as borrowers and lenders.e. in the end of the banking week.• It has been observed that system of maintaining reserves weekly and manipulation of the SLR.

. • It is also sensitive to demand and supply of call loans. • Two call rates in India: – The interbank call rate.Call Rates • Definition: The rate of interest paid on call loans is called the call rate. – The lending rate of DFHI. • It is very volatile and varies from center to center as well.

UTI.Volatility of Call Rates: Variations according to Trading Centres. etc) – The call money rate generally moves in sympathy with the rate of demand loans but it is always lower than the latter. . LIC. Some reasons are: – Demand is greater than supply in Calcutta. • Among the 3 most important centresChennai. Mumbai and Calcutta – the call rate is highest in Calcutta and lowest in Mumbai. – Supply is more because many financial headoffices are located in Mumbai. (RBI.

Reasons for Volatility • Large borrowings to meet CRR. • Withdrawal of funds by institutional lenders for business needs. • Factors in the market. . • Illiquidity of money markets. • Closely linked to forex market (RBI intervenes then to control call rates). • Established banks use CMM as a source of funds to meeting structural disequilibria.

.. • Technical modalities in calculation of reserves. • Structural deficiencies in the banking systems.Reasons for Volatility Continued.

Corporates. . • The daily average turnover increased from Rs. etc.Development of CMM • Automated value-free services of securities was facilitated to develop the Collateralized Borrowing and Lending Operations (CBLO). insurance companies. 47 crore in April 2003 to Rs. • CBLO segment members consist of banks. mutual funds. NBFCs. FIs. 2506 crore in March 2004.

.Development of CMM • Mutual funds have emerged as the largest suppliers of funds. the composition has been changing. • On demand. apart co-op banks.390 crore in 2006-07. the average daily turnover increased to Rs. public and private sector banks. 32. • With the transformation of the CMM into pure inter-bank market in Aug 2005.

• The RBI and the members have access to this information on a faster frequency and a classified manner which further improves transparency.Policy Development • The RBI has instituted a series of prudential measures and placed limits on borrowing and lending of banks and PDs to minimize default risk. • In order to improve transparency. it was made mandatory for all Negotiated Dealing System (NDS) members to report their call money transactions through NDS 15 mins before the conclusion of the transaction. .