Call Money Market in India

What is Money Market?

Money Market is a market for trading in short-term loans between banks and financial institutions. Participants in the money market borrow and lend for the short term.

The short-term instruments traded in the Money Market are Call Money Market, Treasury Bills (91 days and 364 days), Certificates of Deposits, Commercial papers, Repurchase agreements and so on.

Call Money Market deals in short-term financial assets, which are close substitutes for money and are repayable on demand.

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Call Money Market in India

1. Call Money Market:

Call Money Market mainly deals with day-to-day surplus funds of banks. In India, the purpose of Call Loans are to deal in the Bullion Market and Stock Exchanges.

• Money lent for one day in this market is known as “Call Money”.
• Money lent for more than a day, but less than 15 days, is called “Notice Money”.
• Money lent for 15 days or more in the Inter-Bank Market is called “Term Money”.

Mumbai, Kolkata, Delhi, Chennai and Ahmedabad host the major Call Money Markets in India.

2. Participants in the Indian Call Money Market:

• Indian and Foreign Commercial Banks, Co-operative Banks, Discount and Finance House of India Ltd. (DFHI) and Securities Trading Corporation of India (STCI), participate as both lenders and borrowers.
• Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) participate only as lenders.

3. Why do banks borrow to participate in the Call Money Market?

Call Money helps banks maintain equilibrium in their short-term liquidity positions. Therefore, banks borrow in this market to:

1. Address temporary mismatches in funds.
2. Meet Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
3. Meet the unexpected demand for funds due to large outflows.

See also: What is Primary Market?

4. Call Rate:

Call Rate is the rate of interest that is paid on Call Money Loans. It is highly volatile because the changes in demand and supply of Call Loans are instantly reflected in Call Rates. Call Rate also helps the RBI access the liquidity situation in the economy.

There are two Call Rates in India:

1. Inter-bank Call Rate
2. Lending rate of DFHI

The eligible participants are free to decide Call Rates in the Call Money Market. Interest payable on Call Money is based on the methodology given by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), which is a voluntary association of Commercial Banks, Financial Institutions and Primary Dealers.

5. How does the Call Money Market Function?

Call Loans are availed through auctions or negotiations on Call Rates.  The highest bidder gets the loan. Electronic trading platform called Negotiated Trading System (NDS), deals with Call Money. The Call Money Market is known as the most sensitive segment of the financial system.

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