Money Market

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.
Call Money Market
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 interbank 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.
The call/notice/term money market is a market for trading very short term
liquid financial assets that are readily convertible into cash at low cost.
The money market primarily facilitates lending and borrowing of funds
between banks and entities like Primary Dealers. An institution which has
surplus funds may lend them on an uncollateralized basis to an institution
which is short of funds. The period of lending may be for a period of 1 day
which is known as call money and between 2 days and 14 days which is

known as notice money. Term money refers to borrowing/lending of funds

for a period exceeding 14 days. The interest rates on such funds depends
on the surplus funds available with lenders and the demand for the same
which remains volatile.
This market is governed by the Reserve Bank of India which issues
guidelines for the various participants in the call/notice money market.
The entities permitted to participate both as lender and borrower in the
call/notice money market are Scheduled Commercial Banks (excluding
RRBs), Co-operative Banks other than Land Development Banks and
Primary Dealers.
Scheduled commercial banks are permitted to borrow to the extent of
125% of their capital funds in the call/notice money market, however their
fortnightly average borrowing outstanding should not exceed more than
100% of their capital funds (Tier I and Tier II capital). At the same time
SCBs can lend to the extent of 50% of their capital funds on any day,
during a fortnight but average fortnightly outstanding lending should not
exceed 25 per cent of their capital funds.
Co-operative Banks are permitted to borrow upto 2% of their aggregate
deposits as end of March of the previous financial year in the call/notice
money market.
Primary Dealers can borrow on average in a reporting fortnight up to
200% of the total net owned funds (NOF) as at end-March of the previous
financial year and lend on average in a reporting fortnight up to 25% of
their NOF.
The average daily turnover in the call money market is around Rs.
12,000-13,000 cr every day and trading occurs between 9.30 am to 5.00
pm on Monday to Friday and 9.30 am to 2.30 pm on Saturday.
The trades are conducted both on telephone as well as on the NDS Call
system, which is an electronic screen based system set up by the RBI for
negotiating money market deals between entities permitted to operate in

the money market. The settlement of money market deals is by electronic

funds transfer on the Real Time Gross Settlement (RTGS) system
operated by the RBI. The repayment of the borrowed money also takes
place through the RTGS system on the due date of repayment.
This is the market for very short term funds, known as money on call. The
rate at which funds are borrowed in this market is called `Call Money
rate'. The size of the market for these funds in India is between Rs 60,000
million to Rs 70,000 million, of which public sector banks account for 80%
of borrowings and foreign banks/private sector banks account for the
balance 20%. Non-bank financial institutions like IDBI, LIC, GIC etc
participate only as lenders in this market. 80% of the requirement of call
money funds is met by the non-bank participants and 20% from the
banking system
The call money market refers to the market for extremely short period
loans; say one day to fourteen days. These loans are repayable on
demand at the option of either the lender or the borrower. As stated
earlier, these loans are given to brokers and dealers in stock exchange.
Similarly, banks with surplus lend to other banks with deficit funds in the
call money market. Thus, it provides an equilibrating mechanism for
evening out short term surpluses and deficits. Moreover, commercial bank
can quickly borrow from the call market to meet their statutory liquidity
requirements. They can also maximize their profits easily by investing
their surplus funds in the call market during the period when call rates are
high and volatile.
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:
To commercial banks to meet large payments, large remittances to
maintain liquidity with the RBI and so on.
To the stock brokers and speculators to deal in stock exchanges and
bullion markets.
To the bill market for meeting matures bills.
To the Discount and Finance House of India and the Securities Trading
Corporation of India to activate the call market.
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.
Those permitted to act as both lenders and borrowers of call loans.
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.