CALL MONEY MARKETCALL MONEY MARKET

MeaningMeaning Call money market is that part of theCall money market is that part of the national money market where the day-national money market where the day- to-day surplus funds, mostly of banks, to-day surplus funds, mostly of banks, are traded in.are traded in.

The loans made in this market are of a The loans made in this market are of a short-term nature, their maturity varyingshort-term nature, their maturity varying between one day to a fortnight.between one day to a fortnight.

As these loans are repayable on demand As these loans are repayable on demand and at the option of either the lender or and at the option of either the lender or the borrower, they are highly liquid, their the borrower, they are highly liquid, their liquidity being exceeded only by cash. liquidity being exceeded only by cash.

The nature of Call money market in The nature of Call money market in different countries varies from each different countries varies from each other.other.

Differences in institutional structures accountDifferences in institutional structures account for differences in the nature, participants, for differences in the nature, participants, purposes or types of transactions in such purposes or types of transactions in such markets.markets. All, however, have one common feature:All, however, have one common feature: They deal in loans which have a very They deal in loans which have a very short maturity and are highly liquid.short maturity and are highly liquid.

As R S Sayers has pointed out, As R S Sayers has pointed out,

“ “Everywhere banks look in their assets forEverywhere banks look in their assets for

a nice combination of profit and liquidity, a nice combination of profit and liquidity,

and this leads to a considerable degree and this leads to a considerable degree

of similarity in balance sheet structures. of similarity in balance sheet structures.

The similarity cannot amount to The similarity cannot amount to

uniformity because there is no uniformuniformity because there is no uniform

availability of assets for bankers inavailability of assets for bankers in

different countries.”different countries.”

CALL MONEY MARKET IN INDIACALL MONEY MARKET IN INDIA

The call loans in India are given :The call loans in India are given :

To the bill market For the purpose of To the bill market For the purpose of dealing in the bullion markets and stock dealing in the bullion markets and stock exchanges Between banks, and exchanges Between banks, and Frequently to individuals of high financialFrequently to individuals of high financial

status in Mumbai for ordinary trade status in Mumbai for ordinary trade

purposes in order to save interest on cashpurposes in order to save interest on cash

credits and overdrafts. credits and overdrafts.

Among these uses inter-bank use has Among these uses inter-bank use has been the most significant and their use been the most significant and their use on stock exchanges and other markets on stock exchanges and other markets has been modest. has been modest.

Call loans in India have a maturity anywhere between Call loans in India have a maturity anywhere between one day to a fortnight. one day to a fortnight.

While the call money market deals in overnight funds, While the call money market deals in overnight funds, notice money market deals in funds for 2-14 days.notice money market deals in funds for 2-14 days.

Money at call and short notice in the balance sheets ofMoney at call and short notice in the balance sheets of commercial banks is a highly liquid asset. commercial banks is a highly liquid asset. Unlike in other countries, call loans in India are unsecured.Unlike in other countries, call loans in India are unsecured.

Money and credit situation in India every Money and credit situation in India every

year is subject to seasonal fluctuations.year is subject to seasonal fluctuations.

Unlike in other countries, transactions orUnlike in other countries, transactions or

trading on the call money market is also trading on the call money market is also

believed to be characterised by seasonal believed to be characterised by seasonal

variations.variations.

The seasonal ups and downs are believedThe seasonal ups and downs are believed

to be reflected in the volume of money atto be reflected in the volume of money at

call and short-notice, and call money call and short-notice, and call money

rates at different times of the year.rates at different times of the year.

The seasonal nature of the call moneyThe seasonal nature of the call money

market would be reflected in two market would be reflected in two

indicators:indicators: A decline in money at call and short A decline in money at call and short

notice should be greater in the slack notice should be greater in the slack

season than in the busy season of a givenseason than in the busy season of a given

year.year. An increase in money at call and short An increase in money at call and short

notice should be greater in the busy notice should be greater in the busy

season than in the slack season. season than in the slack season.

PARTICIPATIONPARTICIPATION

Participants in the call money market Participants in the call money market areare

a.a. Scheduled commercial banksScheduled commercial banks

b.b. Non-scheduled commercial banksNon-scheduled commercial banks

c.c. Foreign banksForeign banks

d.d. State, district and urban, cooperative State, district and urban, cooperative banks banks

e. e. Discount and Finance House of India Discount and Finance House of India

(DFHI) (DFHI)

f. Securities Trading Corporation of India f. Securities Trading Corporation of India

(STCI)(STCI)

CALL RATES

The rate of interest paid on call loans is known as the call rate. The call rate is highly variable from day to day, and often from hour to hour. It varies from centre to centre also. It is very sensitive to changes in demand for and supply of call loans.

VOLATILITY IN CALL RATESVOLATILITY IN CALL RATES

Variations According to Trading CentresVariations According to Trading Centres

Among three important centres Mumbai, Calcutta and Chennai- The call rate is highest in Calcutta and the lowest in Mumbai.

The relatively higher rate in Calcutta mayThe relatively higher rate in Calcutta may

be due to the fact that the demand for be due to the fact that the demand for

funds there is greater than the supply, funds there is greater than the supply,

compared to the situation in Mumbai.compared to the situation in Mumbai.

The supply of call loans in Mumbai is The supply of call loans in Mumbai is

greater owing to the location of the head greater owing to the location of the head

offices of not only many banks but also of offices of not only many banks but also of

several other non-banking financial several other non-banking financial

institutions like LIC and UTI. institutions like LIC and UTI.

The demand for funds in calcutta is The demand for funds in calcutta is

greater because the volume of trade greater because the volume of trade

there is greater.there is greater.

Not only is the demand greater, but it is Not only is the demand greater, but it is

concentrated because of the large concentrated because of the large

number of commodities dealt in and the number of commodities dealt in and the

overlapping of seasons.overlapping of seasons.

The trading in commodities like jute, The trading in commodities like jute,

tea and coal absorbs a large amount of tea and coal absorbs a large amount of

funds.funds.

Also, contacts between the indigenous Also, contacts between the indigenous

bankers and the organised money market bankers and the organised money market

in Calcutta are relatively weak. This in Calcutta are relatively weak. This

results in a smaller flow of funds across results in a smaller flow of funds across

markets, leading to an increase inmarkets, leading to an increase in

interest rate. interest rate.

CALL RATE VIS-A-VIS BANK CALL RATE VIS-A-VIS BANK RATERATE

As borrowing from the RBI As borrowing from the RBI

constitutes an important alternative constitutes an important alternative

source of accommodation for banks, source of accommodation for banks,

the relation between the bank rate the relation between the bank rate

and the call rate is significant.and the call rate is significant.

In India, except in 1955-56,the call rateIn India, except in 1955-56,the call rate

(Mumbai) has exceeded the bank rate till (Mumbai) has exceeded the bank rate till

1975-76, after which it has been 1975-76, after which it has been

sometimes higher and sometimes lower sometimes higher and sometimes lower

than the bank rate. than the bank rate.

REASONS FOR CALL RATE REASONS FOR CALL RATE VOLATILITYVOLATILITY

The extreme volatility of the call rate can beThe extreme volatility of the call rate can be

attributed to factors such as the following:attributed to factors such as the following:

1.1. Large borrowings on certain dates by banks toLarge borrowings on certain dates by banks to

meet the CRR requirements and sharp meet the CRR requirements and sharp

reduction in the demand for call money oncereduction in the demand for call money once

CRR are met. The call rates rise sharply in theCRR are met. The call rates rise sharply in the

first week of the reporting fortnight, and first week of the reporting fortnight, and

subside in the second week when banks have subside in the second week when banks have

covered their cash reserve requirementscovered their cash reserve requirements. .

2. 2. The credit operations of certain banksThe credit operations of certain banks

tend to be much in excess of their own tend to be much in excess of their own

resources. These banks with resources. These banks with

overextended credit position treat call market overextended credit position treat call market

as a source of funds for meeting structural as a source of funds for meeting structural

disequilibria in their sources and uses of funds.disequilibria in their sources and uses of funds.

3. 3. The occasional factors in the market also affect The occasional factors in the market also affect

the volatility.the volatility.

For example, in the recent past, the call rate For example, in the recent past, the call rate

had shot up due to disruption in the banking had shot up due to disruption in the banking

industry. industry.

4. 4. The withdrawal of funds by institutional The withdrawal of funds by institutional lenders to meet their business needs, lenders to meet their business needs, and by the corporate sector for payment and by the corporate sector for payment of advance tax leads to steep increase inof advance tax leads to steep increase in the call rate. the call rate.

5.5. The liquidity crises or illiquidity in money The liquidity crises or illiquidity in money markets also contributes to the call rate markets also contributes to the call rate volatility. Banks invest funds when call volatility. Banks invest funds when call market is easy) in government securities, market is easy) in government securities, units, and public sector bonds in order to units, and public sector bonds in order to maximise earnings from their funds maximise earnings from their funds management. management. Cont…Cont…

But with no buyers in the markets,But with no buyers in the markets,

these instruments tend to becomethese instruments tend to become

illiquid which highlight liquidity illiquid which highlight liquidity

crisis in the call market pushing up crisis in the call market pushing up

the call rate significantly. the call rate significantly.

7.7. In the recent past, the forex market and In the recent past, the forex market and call money market have become quitecall money market have become quite closely interlinked; the changes in theclosely interlinked; the changes in the former have come to affect the latter former have come to affect the latter significantly.significantly. The sharp increases in call rates on The sharp increases in call rates on November 3,1995, and again between November 3,1995, and again between the middle of February to the middle of the middle of February to the middle of March 1996 were largely due to the March 1996 were largely due to the turbulence in the forex market, and the turbulence in the forex market, and the RBI intervention in the forex market. RBI intervention in the forex market. Cont…Cont…

The RBI intervention in order to prevent The RBI intervention in order to prevent the unusual depreciation of the rupee,the unusual depreciation of the rupee, and the temporary withdrawal of the and the temporary withdrawal of the money market support so as to first money market support so as to first stabilise the forex markets have become stabilise the forex markets have become important factors behind the flaring of callimportant factors behind the flaring of call rates into the recent past. rates into the recent past.

8.8.The technical modalities of the The technical modalities of the calculation of reserves requirements also calculation of reserves requirements also leads to sharp swings in the call rate.leads to sharp swings in the call rate.

9.9.The structural deficiencies in the bankingThe structural deficiencies in the banking

system and the practice of the banks to system and the practice of the banks to

window-dress their deposits also have window-dress their deposits also have

been the important contributory factorsbeen the important contributory factors

in this context. in this context.