Definition of 'Bank'

A financial institution licensed as a receiver of deposits. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or central bank.

Investopedia explains 'Bank'

Commercial banks are mainly concerned with managing withdrawals and deposits as well as supplying short-term loans to individuals and small businesses. Consumers primarily use these banks for basic checking and savings accounts, certificates of deposit and sometimes for home mortgages. Investment banks focus on providing services such as underwriting and corporate reorganization to institutional clients.

While many banks have both a brick-and-mortar and online presence, some banks have only an online presence. Onlineonly banks often offer consumers higher interest rates and lower fees. Convenience, interest rates and fees are the driving factors in consumers' decisions of which bank to do business with. As an alternative to banks, consumers can opt to use a credit union.

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. Due to their influence within a financial system and the economy, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for

profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its roots in the ancient world. In the history of banking, a number of banking dynasties have played a central role over many centuries. The oldest existing bank was founded in 1472.

Origin of the word[edit]

The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.
[7]

One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented in theBritish Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza () means both a table and a bank.

Definition of 'Money Market'

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

Structure of Indian Money Market - Chart

The entire money market in India can be divided into two parts. They are organised money market and the unorganized money market. The unorganised money market can also be known as an unauthorized money market. Both of these components comprise several constituents. The following chart will help you in understanding the organisational structure of the Indian money market.

Components, SubMarkets of Indian Money Market

After studying above organisational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below. 1. Call Money Market : It an important sub market of the Indian money market. It is also known as money at call and money at short notice. It is also called inter bank loan market. In this market money is demanded for extremely short period. The duration of such transactions is from few hours to 14 days. It is basically located in the industrial and commercial locations such as Mumbai, Delhi, Calcutta, etc. These transactions help stock brokers and dealers to fulfill their financial requirements. The rate at which money is made available is called as a call rate. Thus rate is fixed by the market forces such as the demand for and supply of money. 2. Commercial Bill Market : It is a market for the short term, self liquidating and negotiable money market instrument. Commercial bills are used to finance the movement and storage of agriculture and industrial goods in domestic and foreign markets. The commercial bill market in India is still underdeveloped. 3. Treasury Bill Market : This is a market for sale and purchase of short term government securities. These securities are called as Treasury Bills which are promissory notes or financial bills issued by the RBI on behalf of the Government of India. There are two types of treasury bills. (i) Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treasury Bills. The maturity period of these securities range from as low as 14 days to as high as 364 days. They have become very popular recently due to high level of safety involved in them. 4. Market for Certificate of Deposits (CDs) : It is again an important segment of the Indian money market. The certificate of deposits is issued by the commercial banks. They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh. The minimum subscription of CD should be worth Rs. 1 Crore. The maturity period of CD is as low as 3 months and as high as 1 year. These are the transferable investment instrument in a money market. The government initiated a market of CDs in order to widen the range of instruments in the money market and to provide a higher flexibility to investors for investing their short term money. 5. Market for Commercial Papers (CPs) : It is the market where the commercial papers are traded. Commercial paper (CP) is an investment instrument which can be issued by a listed company having working capital more than or equal to Rs. 5 cr. The CPs can be issued in multiples of Rs. 25 lakhs. However the minimum subscription should at least be Rs. 1 cr. The maturity period for the CP is minimum of 3 months and maximum 6 months. This was introcuced by the government in 1990.

6.

Short Term Loan Market : It is a market where the short term loan requirements of corporates are met by the Commercial banks. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.

call money market Definition Market in which brokers and dealers borrow money to satisfy their credit needs, either to finance their own inventory of securities or to cover their customers' margin accounts.

Call money is a short term finance repayable on demand, with maturity period of one day to fifteen days, used for inter bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks. Call money is a method by which banks lend from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money is known as call rate. It is a highly volatile rate that varies from day-to-day and sometimes even from hour-to-hour. There is an inverse relationship between call rates and other short-term money market instruments such as certificates of deposit and commercial paper. A rise in call money rates make other sources of finance such as commercial paper and certificates of deposit cheaper in comparison for banks raise funds from these sources.

Money market in India

The Indian money market is "a market for short-term and Long term funds with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money."[1] It is diversified and has evolved through many stages, from the conventional platform of treasury bills and call money to commercial paper, certificates of deposit, repos, FRAs and IRS more recently. The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit. The money market fulfills the borrowing and investment requirements of providers and users of short-term funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It also serves as a focal point for the Central Bank's intervention in the market.

Structure[edit]
The Indian money market consists of the unorganised sector: moneylenders, indigenous bankers, chit funds; organised sector: Reserve Bank of India, private banks, public sector banks, development banks and other Non Banking Financial Companies(NBFCs) such as Life Insurance Corporation of India (LIC),Unit Trust of India (UTI), the International Finance Corporation, IDBI, and the co-operative sector.

Instruments[edit]
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Call money market[edit]

The call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 14 days. S.K. Muranjan commented that call loans in India are provided to the bill market, rendered between banks, and given for the purpose of dealing in the bullion market and stock exchanges.[2] Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI) participate as both lenders and borrowers and Life Insurance Corporation of India (LIC), Unit Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can participate only as lenders. The interest rate paid on call money loans, known as the call rate, is highly volatile. It is the most sensitive section of the money market and the changes in the demand for and supply of call loans are promptly reflected in call rates. There are now two call rates in India: the Inter bank call rate'and the lending rate of DFHI. The ceilings on the call rate and inter-bank term money rate were dropped, with effect from May 1, 1989. The Indian call money market has been transformed into a pure inter-bank market during 200607. [3] The major call money markets are in Mumbai, Kolkata, Delhi, Chennai, Ahmedabad.

Treasury bill market[edit]

Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount. The interest received on them is the discount which is the difference between the price at which they are issued and their redemption value. They have assured yield and negligible risk of default. Under one classification, treasury bills are categorised as ad hoc, tap and auction bills and under another classification it is classified on the maturity period like 91-days TBs, 182-days TBs, 364-days TBs and two types of 14-days TBs. In the recent times (200203, 200304), the Reserve Bank of India has been issuing only 91-day and 364-day treasury bills. the auction format of 91-day treasury bill has changed from uniform price to multiple price to encourage more responsible bidding from the market players.[4] the bills are two kindsAdhoc and regular. the adhoc bills are issued for investment by the state governments, semi government departments and foreign central banks for temporary investment. they are not sold to banks and general public. The treasury bills sold to the public and banks are called regular treasury bills. they are freely marketable. commercial bank buy entire quantity of such bills issued on tender . they are bought and sold on discount basis.

Ready forward contract (Repos)[edit]

Repo is an abbreviation for Repurchase agreement, which involves a simultaneous "sale and purchase" agreement.[5] When banks have any shortage of funds, they can borrow it from Reserve Bank of India or from other banks. The rate at which the RBI lends money to commercial banks is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.[1].

Money market mutual funds[edit]

Money market mutual funds invest money in specifically, high-quality and very short maturitybased money market instruments. The RBI has approved the establishment of very few such funds in India. In 1997, only one MMMF was in operation, and that too with very small amount of capital.[6]

Reserve Bank of India[edit]

The influence of the Reserve Bank of India's power over the Indian money market is confined almost exclusively to the organised banking structure.It is also considered to be the biggest regulator in the markets. There are certain rates and data which are released at regular intervals which have a huge impact on all the financial markets in INDIA. The unorganised sector, which consists mostly of indigenous bankers and non-banking financial companies, although occupying an important position in the money market have not been properly integrated with the rest of the money market.[7]

Reforms[edit]
The recommendations of the Sukhmoy Chakravarty Committee on the Review of the Working of the Monetary system, and the Narasimham Committee Report on the Working of the Financial System in India, 1991, The Reserve Bank of India has initiated a series of money market reforms basically directed towards the efficient discharge of its objectives. The bank reduced the ceiling rate on bank advances and on inter-bank call and short-notice money. There has been a significant lowering of the minimum lending rate of commercial banks and public sector development financial institutions from 18% in 199091 to 10.5% in 200506.[8] Reforms made in the Indian Money Market are:- Deregulation of the Interest Rate : In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations. Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds. Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has played an important role in stabilizing the Indian money market. Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or

injection of financial resources. Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market. Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing System. Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.

Definition of 'Interbank Call Money Market'

A short-term money market, which allows for large financial institutions, such as banks, mutual funds and corporations to borrow and lend money at interbank rates. The loans in the call money market are very short, usually lasting no longer than a week and are often used to help banks meet reserve requirements.

STRUCTURE OF INDIAN MONEY MARKET

Organised Sector Call and Notice Money Market Treasury Bill Market Commercial Bills Certificate of Deposits Commercial Papers Money Market Mutual Funds The REPO Market DFHI

Unorganised Sector Indigenous Bankers Money Lenders NBFI

The Interbank Money Market in India: Evidence on Volatility, Efficacy of Regulatory Initiatives and Implications for Interest Rate Targeting

Himanshu Joshi* The working of the interbank money market (the call money market) and the conduct of monetary policy are inextricably linked in economies that depend predominantly on indirect instruments of monetary policy. The stability of the call money rate, namely, the rate at which short term funds are lent and borrowed is, therefore, of critical importance to central banks which view it as an operational target to signal the stance of monetary policy. Experience shows that regulatory initiatives taken to 7

improve the efficiency of market functioning also help in fostering market stability. In the Indian case, for example, it may not be inappropriate to postulate that permitting a wider section of market constituents to operate in the repos market ( viz., outside the central bank) since March 2003 led to a reduction in the volatility of the call money rate caused by improved matching of demand/supply between deficit/surplus segments. By the same token, therefore, there is a case for encouraging increased participation and, more importantly, expanding the range of eligible collateral for market repos to enhance the efficacy of short term interest rate targeting. The measures announced in the Annual Policy statement for 2005-06 and the suggestions made by the Technical Advisory Committee on Money Market to further expand the scope of activity in market repos are, therefore, highly significant in the present context. JEL Classification : E52 Keywords : Call money market rate, Liquidity Adjustment Facility (LAF), Autoregressive Conditional Heteroscedasticity, Conditional Variance. Introduction The overnight call money or the inter-bank money market rate is presumably the most closely watched variable in day-to-day conduct of monetary operations and often serves as an operating target for policy purposes. The choice of operating tactics from * The views expressed in the paper are solely those of the author and must not be ascribed to the institution to which he belongs.

quantity to rate based targeting, following the IS/LM based analysis of Poole (1970), has been largely accepted in favour of interest rate targeting, because of the diminished link between monetary aggregates and economic objectives of monetary policy as a result of the fast pace of financial innovations. Most central banks, therefore, presently use indirect instruments in an attempt to maintain the short term interest rate at a desirable level with the use of appropriate liquidity management practices. The most common of these instruments of liquidity management is the central banks repo facility which enables modulation of the marginal liquidity on a day to day basis so as to ensure stable conditions in the money market and, particularly, to maintain the short term money market rate as close as possible to the official/policy rate. Changes in the short-term policy rate made by central banks provide signals to markets, and various segments of the financial system, therefore, respond by adjusting interest rates/returns depending on their sensitivity and the efficacy of the transmission mechanism. 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 eventually inflation and growth in the economy. It is, therefore, clear that the interest rate stance of a central bank and its implications for economic activity and inflation play an important role in the conduct of monetary policy. 8

The objective of the paper is, therefore, to assess the volatility pattern of the call money rate in India during the last three years and to estimate its sensitivity vis--vis the Reserve Bank of Indias liquidity adjustment facility (LAF) auction decisions for the purpose of eliciting underlying market characteristics. Attempt is made to provide evidence, albeit indirectly, on how regulatory changes related to other instruments in the money market may have affected the functioning of the interbank call money market. Finally, some evidence is also offered on the link between money market volatility and interest sensitive financial markets, particularly the government securities market. The remainder of the paper is structured as follows. Section I provides an overview of liquidity management in India while cross-country experience is set out in Section II. Data used in the analysis are explained in Section III. Methodology used and the empirical analysis are presented in Section IV and concluding observations are given in Section V. Features The call mkt enables the banks & institutions to even out their day to day deficits n surplus of money. Comm banks co-oper banks & primary dealers are allowed to borrow n lend in this mkt 4 adjusting their cash reserve requiremnts. Specified all india financial institutions, mutual funds n certain specified entites r allowed 2 access call money only as lenders. It is completely interbank mkt hence non bank entited r nt allowed to access in this mkt. Interest rates in the call money mkt r mkt determined.
What is Call Money Market ?[Top ] The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for 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". Term Money 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 Money Market and make Call Money market as exclusive market for Bank/s & PD/s. What are Money Market Instruments? [Top ] By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year.The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. The below mentioned instruments are normally termed as money market instruments: 1. Certificate of Deposit (CD)

2.

Commercial Paper (C.P)

3.

Inter Bank Participation Certificates

4.

Inter Bank term Money

5.

Treasury Bills

6.

Bill Rediscounting

7.

Call/ Notice/ Term Money

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CALL/NOTICE MONEY MARKET OPERATIONS IN INDIA The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days. Banks borrow in this money market for the following propose. 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 Participants Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. Of these, banks and PDs can operate both as borrowers and lenders in the market. But non-bank institutions (such as all-India FIs, select Insurance Companies or Mutual Funds), which have been given specific permission to operate in call/notice money market can, however, operate as lenders only. No new non-bank institutions are permitted to operate (i.e., lend) in the call/notice money market with effect from May 5, 2001. In case any eligible institution has genuine difficulty in deploying its excess liquidity, RBI may consider providing temporary permission to lend a higher amount in call/notice money market for a specific period on a case-by-case basis. Effective from Aug 06, 2005 non-bank participants except Primary Dealers are to discontinue participate, to make the call money market pure inter-bank market. Prudential norms of RBI Lending of scheduled commercial banks, on a fortnightly average basis, should not exceed 25 per cent of their capital fund. However, banks are allowed to lend a maximum of 50% on any day, during a fortnight. Borrowings by scheduled commercial banks should not exceed 100 per cent of their capital fund or 2 per cent of aggregate deposits, whichever is higher. However, banks are allowed to borrow a maximum of 125 per cent of their capital fund on any day, during a fortnight. Interest Rate Eligible participants are free to decide on interest rates in call/notice money market.

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