Call Money Markets

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.

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The most active segment of the money market has been the call money market, where the day to day
imbalances in the funds
position of scheduled commercial banks are eased out. The call notice money market has graduated into a
broad and vibrant
institution .

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is
borrowed or lent for a
day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this
purpose. 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 collateral
security is required
to cover these transactions.

The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are
allowed to
borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified
entities are
allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken
steps to make the
call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed
access to this market
beyond December 31, 2000.

From May 1, 1989, the interest rates in the call and the notice money market are market determined.
Interest rates in this
market 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 not
uncommon. Hence there is
a high degree of interest rate risk for participants. In view of the short tenure of such transactions, both the
borrowers and the
lenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick and
timely debit and
credit operations. The call market enables the banks and institutions to even out their day to day deficits
and surpluses of
money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve
requirements (CRR).
The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying
funds on short term
basis.

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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 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.
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.


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THERE seems to be a role reversal of sorts in the inter-bank call money market. Excepting a few big fish,
most
nationalised 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 facing
dearth of liquidity
in patches, say bankers.

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

The increased demand for funds seems to be due to a combination of factors - - a pick-up in credit disbursal
witnessed over
the past month, being the prominent among them. Other requirements are more routine needs such as
fulfilment 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 resorting
to borrowing in the
call money market as a stop-gap arrangement for funding needs,'' confided the treasury head of a public-
sector bank. The
rates in the call money market had been low and `attractive' in the 5.50-5.60 per cent range, much lower
than the average cost
of funds at 6.75 per cent, he added.

Public-sector banks are locked into their holdings in government securities at the moment. Said the treasury
head of a
nationalised bank: "We had bought these g-secs at higher prices and therefore it does not make sense to
sell them now and
book 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 banks
are sitting on
depreciation in the value of their holding. On an average 40-45 per cent of most nationalised banks' balance
sheets were
invested in `zero-risk' government securities, said a debt market analyst. However, the liquidity in the
system has not vanished
over-night. Bankers are keeping their fingers crossed with the hope that g-sec prices will rise once again on
quelling of
tensions 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 are
by nature borrowers. "Having sold our positions in g-secs over the past fortnight, we are now sitting on pots
of cash, which
have to be lent out,'' said the trading head of a private sector.

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

Also, as liquidity was aided by RBIs reported intervention in the forex market (buying dollars), inter-bank
rates remained
supported at around the current levels.

The average repo numbers at the liquidity adjustment facility window stood at Rs 12,149 crore against Rs
13,332 crore
previously, while the average reverse repo figure was up at Rs 210 crore against Rs 171 crore of the
previous week.
The cumulative collateralised borrowing and lending obligation volumes for the week fell to Rs 72,994 crore
from Rs 97,246
crore.

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.


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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 mopped
up bids worth only Rs 210 crore through the reverse repo operations at the second session of liquidity
adjustment.

On the other hand, the central bank infused funds worth Rs 12,115 crore through the repo operations under
both sessions. The
bond 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, after
the government
cut import duty on some items. The yield on the benchmark 8.07% 2017 bond ended at 7.87%, lower than
the previous close
of 7.9%.

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

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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.
2. Those permitted to act only as lenders in the market.
The first category includes all commercial banks. Co-operative banks, DFHI and STCI. In the second category
LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are included. They can only lend and they
cannot borrow in the call market.
Advantages of call money
In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among
themselves and such loans are called inter-bank loans. They are very popular in India. So many advantages are
available to commercial banks. They are as follows:
High Liquidity: Money lent in a call market can be called back at any time when needed. So, it is highly
liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on
the market.
High Profitability: Banks can earn high profiles by lending their surplus funds to the call market when
call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks
temporarily.
Maintenance Of SLR: Call market enables commercial bank to minimum their statutory reserve
requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR
requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve
requirements. It will tell upon their profitability.
Safe And Cheap: Though call loans are not secured, they are safe since the participants have a strong
financial standing. It is cheap in the sense brokers have been prohibited form operating in the call market.
Hence, banks need not pay brokers on call money transitions.
Assistance To Central Bank Operations: Call money market is the most sensitive part of any financial
system. Changes in demand and supply of funds are quickly reflected in call money rates and give an
indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an
efficient call market helps the central bank to carry out its open market operations effectively and
successfully.
Drawbacks of call money
The call market in India suffers from the following drawbacks:
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 large
number 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.
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