Call Money Market: What do you mean by

Call Money Market?

This is the most active and sensitive part of the organized money market. It is centred mainly
at Bombay. Calcutta and Madras are the market at Bombay being the most important. It deals
in one-day loans (called call loans or call money) which may or may not be renewed the next
day. The participants are mostly banks. Therefore, it is also called inter-bank call money
market. The borrowing side is limited exclusively to banks, which are temporarily short of
funds. On the lending side, too, there are mostly banks with temporary excess of cash.

As special cases, a few other financial institutions like the LIC and the UTI are also allowed
to place on call their short-term funds and earn interest on them. All others have to keep their
funds in term deposits of minimum 15 days with banks in order to earn interest. For, banks
are prohibited from paying interest on deposits made for less than 15 days. Such deposits are
treated as current account deposits.

In the past, companies (financial or non-financial) as well as quasi- government bodies and
individuals with large short-term surpluses were allowed to place such funds on call with
banks. Such money from companies and individuals, known as house money, used to be an
important source of call money for banks. Finance brokers used to act as intermediaries
between borrowing banks and lending houses. All this has changed now. From March 1978
banks have been prohibited from paying brokerage for arranging call loans for them.

Among banks, the State Bank of India (SBI), because of its formidable liquid position, is
always on the lenders side of the market. It acts as the lender of intermediate resort,
whereas the RBI as the countrys central bank is the lender of last resort.

The call advances by the SBI are made against government securities, whereas call loans by
all others are made without security (against only deposit receipts of the borrowing banks).
Since call loans are made on a clean basis, the lending banks have to be highly cautious in
adjudging the ability of borrowing banks to repay at call. Therefore, as borrowers, smaller
banks are always at a disadvantage as compared to larger banks.

The call money market operates through brokers who keen in constant touch with banks in
the city and bring the borrowing and lending banks together. The main function of the market
is to redistribute the pool of day-to-day surplus funds of banks among other banks in
temporary deficit of cash. The business of banking is such that the cash position of banks
keeps on changing from hour to hour. As a result of a days clearing their closing cash
position may be vastly different from their opening cash position.

Some may end the day with large amount of surplus cash and, some with deficit, though
banks as a whole may be holding the desired amount of cash. Moreover, to-days surplus-
cash banks may turn into tomorrows deficit-in-cash banks.

Therefore, there must be an institutional arrangement for making the surpluses of some banks
available to others in temporary deficit for smooth and efficient functioning of the banking
system. The call money market provides just this sort of arrangement. It helps banks
economies their cash and yet improve their liquidity by providing them with the facility to
borrow on call basis.

It also signals such banks as are constantly on only one side (whether borrowing or lending)
of the market to put their house in order. For, either they are overstretching themselves in
making loans and investments or are not doing enough to buy earning assets.

The call money market is a highly competitive and sensitive market. It registers very quickly
the pressures of demand and supply for funds operating in the money market. Thus it acts as
possibly the best available indicator of the liquidity position of the organized money market.

In adjusting its day-to-day monetary policy, the RBI, therefore, takes due notice of it. The
market experiences some regular seasonal changes. It is normally tighter during the busy
season (October-April) than during the slack season (May-September). It is much tighter
during the peak of the busy season (April) before the final dates of quarterly tax payments by
firms, and on the eve of the floatation of government loans.

By its nature the call money rate (of interest) is highly volatile. The pressures of excess
demand push it up easily and of excess supply pull it down easily. Thus, the highest call
money rate of interest in 1990-91 was 70 per cent, 85 per cent in 1991-92 and 85 per cent in
1995-96. But, each year, it got down to manageable levels.

Participants in the Money Market:

Theoretically any one can participate in the market. Yet market practices and regulatory
pronouncements have placed certain restrictions on participation for each of the sub-markets
in the money market. For example, call money market is open to only banks. Financial
Institutions, Insurance companies and Mutual funds can only lend in the market.

ADVERTISEMENTS:

It would therefore be useful to know the participants in each of the sub-markets of money
market. Given below is the list and profile of the participants which participate both in the
Money Market as well as the debt portion of the Capital Market. While all resident entities
are participants in these markets, this section covers the larger and major participants.

1. Central Government:

The Central Government is an issuer of Government of India Securities (G-Secs) and

Treasury Bills (T-bills). These instruments are issued to finance the government as well as for
managing the Governments cash flow. G-Secs are dated (dated securities are those which
have specific maturity and coupon payment dates embedded into the terms of issue) debt
obligations of the Central Government.

These bonds are issued by the RBI, on behalf of the Government, so as to finance the latters
budget requirements, deficits and public sector development programmes. These bonds are
issued throughout the financial year. The calendar of issuance of G-Secs is decided at the
beginning of every half of the financial year.
T-bills are short-term debt obligations of the Central Government. These are discounted
instruments. These may form part of the budgetary borrowing or be issued for managing the
Governments cash flow. T-bills allow the government to manage its cash position since
revenue collections are bunched whereas revenue expenditures are dispersed.

2. State Government:

The State Governments issue securities termed as State Development Loans (SDLs), which
are medium to long-term maturity bonds floated to enable State Governments to fund their
budget deficits.

3. Public Sector Undertakings:

Public Sector Undertakings (PSUs) issue bonds which are medium to long-term coupon
bearing debt securities. PSU Bonds can be of two types: taxable and tax-free bonds. These
bonds are issued to finance the working capital requirements and long-term projects of public
sector undertakings. PSUs can also issue Commercial Paper to finance their working capital
requirements.

Like any other business organization, PSUs generate large cash surpluses. Such PSUs are
active investors in instruments like Fixed Deposits, Certificates of Deposits and Treasury
Bills. Some of the PSUs with long-term cash surpluses are also active investors in G-Secs and
bonds.

4. Scheduled Commercial Banks (SCBs):

Banks issue Certificate of Deposit (CDs) which are unsecured, negotiable instruments. These
are usually issued at a discount to face value. They are issued in periods when bank deposits
volumes are low and banks perceive that they can get funds at low interest rates. Their period
of issue ranges from 7 days to 1 year.

SCBs also participate in the overnight (call) and term markets. They can participate both as
lenders and borrowers in the call and term markets. These banks use these funds in their day-
to-day and short-term liquidity management. Call money is an important tool to manage CRR
commitments.

Banks invest in Government securities to maintain their Statutory Liquidity Ratio (SLR), as
well as to invest their surplus funds. Therefore, banks have both mandated and surplus
investments in G-Sec instruments. Currently banks have been mandated to hold 25% of their
Net Demand and Time Liabilities (NDTL) as SLR. A bulk of the SLR is met by investments
in Government and other approved securities.

Banks participate in PSU bond market as investors of surplus funds. Banks also take a trading
position in the G-Sec and PSU Bond market to take advantage of rate volatility.

Banks also participate in the foreign exchange market and derivative market. These two
markets may be accessed both for covering the merchant transactions or for risk management
purposes. Banks account for the largest share of these markets.
5. Private Sector Companies:

Private Sector Companies issue commercial papers (CPs) and corporate debentures. CPs are
short-term, negotiable, discounted debt instruments. They are issued in the form of unsecured
promissory notes. They are issued when corporations want to raise their short-term capital
directly from the market instead of borrowing from banks.

Corporate debentures are coupon bearing, medium to long term instruments which are issued
by corporations when they want to access loans to finance projects and working capital
requirements. Corporate debentures can be issued as fully or partly convertible into shares of
the issuing corporation.

Bonds which do not have convertibility clause are known as non-convertible bonds. These
bonds can be issued with fixed or floating interest rates. Depending on the stipulated
availability of security these bonds could be classified as secured or unsecured.

Private Sector Companies with cash surpluses are active investors in instruments like Fixed
Deposits, Certificates of Deposit and Treasury Bills. Some of these companies with active
treasuries are also active participants in the G-Sec and other debt markets.

6. Provident Funds:

Provident funds have short term and long term surplus funds. They invest their funds in debt
instruments according to their internal guidelines as to how much they can invest in each
instrument category.

The instruments that Provident funds can invest in are:

(i) G-Secs,

(ii) State Development Loans,

(iii) Bonds guaranteed by the Central or State Governments,

(iv)Bonds or obligations of PSUs, SCBs and Financial Institutions (FIs), and

(v) Bonds issued by Private Sector Companies carrying an acceptable level of rating by at
least two rating agencies.

7. General Insurance Companies:

General insurance companies (GICs) have to maintain certain funds which have to be
invested in approved investments. They participate in the G-Sec, Bond and short term money
market as lenders. It is seen that generally they do not access funds from these markets.

8. Life Insurance Companies:

Life Insurance Companies (LICs) invest their funds in G-Sec, Bond or short term money
markets. They have certain pre-determined thresholds as to how much they can invest in each
category of instruments.
9. Mutual Funds:

Mutual funds invest their funds in money market and debt instruments. The proportion of the
funds which they can invest in any one instrument vary according to the approved investment
pattern declared in each scheme.

10. Non-banking Finance Companies:

Non-banking Finance Companies (NBFCs) invest their funds in debt instruments to fulfill
certain regulatory mandates as well as to park their surplus funds. NBFCs are required to
invest 15% of their net worth in bonds which fulfill the SLR requirement.

11. Primary Dealers (PDs):

The organization of Primary Dealers was conceived and permitted by the Reserve Bank of
India (RBI) in 1995. These are institutional entities registered with the RBI.

The roles of a PD are:

1. To commit participation as Principals in Government of India issues through bidding in

auctions.

2. To provide underwriting services and ensure development of underwriting and market-

making capabilities for government securities outside the RBI.

3. To offer firm buy sell/bid ask quotes for T-Bills & dated securities and to improve
secondary market trading system, which would contribute to price discovery, enhance liquid-
ity and turnover and encourage voluntary holding of government securities amongst a wider
investor base.

4. To strengthen the infrastructure in the government securities market in order to make it

vibrant, liquid and broad based.

5. To make PDs an effective conduit for conducting open market operations.

Location

Call money markets are mainly located in big industrial and commercial centers like Mumbai,
Calcutta, Chennai, Delhi and Ahmedabad. These are also the places where stock exchanges are
located. Among these centers, Mumbai and Calcutta are more significant from the point of view of
the size and buoyancy of the market.

The predominant role of Mumbai in this context is understandable as the head offices of RBI, many
other banks, UTI, and LIC are located there; it also has the biggest stock exchange in the country.
There is a tendency for funds to gravitate towards Mumbai and Calcutta. The development of
communications system has facilitated some cross-country flow of funds. The geographical
integration of call markets, however, is still far from perfect resulting in considerable differences in
the call rates prevailing in different centers.
It has been reported that, apart from the well-recognized markets in big cities, there are a large
number of local call markets developed and operated by ingenious local bankers. For example, in
Saurashtra in Gujarat when large payments or remittances are to be made, the local banks help each
other with overnight funds. Among some banks, there are regular arrangements without the
payment of interest.

For other banks, the price of overnight money is 2 paise per hundred rupees per night. When one
bank presents a cheque for, say Rs. 5 lakhs to another bank which has no funds, the paying banker
approaches the collecting banker to let the funds remain with it overnight and pays at the rate of
interest mentioned above.

Treasury bill market

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. Under another one, it is classified on the maturity period like 91-days
TBs, 182-days TBs, 364-days TBs and also 10-days TBs which has two types. 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.[5] The bills are of two kinds- Adhoc
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 and commercial banks buy entire quantities of such bills, issued on tender.
They are bought and sold on discount basis. Ad-hoc bills were abolished in April 1997.

Treasury Bill Market: Useful notes on Treasury Bill Market!

The Treasury bill market is the market that deals in treasury bills. These bills are short-term
(91-day) liability of the Government of India. In theory, they are issued to meet temporary
needs for funds of the government, arising from temporary excess of expenditure over
receipts.

In practice, they have become a permanent source of funds, because the amount of treasury
bills outstanding has been continually on the increase. Every year more new bills are sold
than get retired. Then, almost every year a part of treasury bills held by the RBI are funded,
that is, are converted into long-term bonds.

Treasury bills are of two kinds:

Ad hoc and regular (or ordinary). Ad hoc means for the particular end or case at hand. Thus
ad hoc treasury bills are issued for providing investment outlets to state governments, semi-
government departments and foreign central banks for their temporary surpluses. They are
not sold to the general public (or banks) and are not marketable.
However, their holders, when in need of cash, can get them rediscounted with the RBI, that
is, sell them back to the RBI. The treasury bills sold directly to the RBI for its keep by the
government is also ad hoes. The treasury bills sold to the public or banks are regular or
ordinary treasury bills. They are freely marketable. Their buyers are almost entirely
commercial banks.

All treasury bills, ad hoc or ordinary, are sold by the RBI on behalf of the central
government. Until July 12, 1965 they used to be sold by lender al weekly auctions. From that
date they are made available on tap throughout the week at a rate of discount fixed by the
RBI. This change was made to make ready supply of bills available to all investors at all
times for investment of their temporary surpluses and also to mop up larger amounts of such
surpluses for the government. The latter, of course, has been eager to borrow all the funds
offered to it.

Bills (of all types) are bought and sold on discounted basis. That is the amount of interest
due on it is paid in the form of discount in the price charged for the bill. This price is thus
lower than its face (par) value by the amount of interest due on the bill. Technically speaking,
the price is simply the discounted (or present) value of the bill and the rate of discount
implied (or used) is the Treasury bill rate. When the RBI buys back bills, it is said to
rediscount them, that is, discount them all over again for their remaining lives. Discounting a
bill means purchasing it at its discounted value.

The Treasury bill market in India, as compared to such markets in the U.S.A. and the U.K., is
highly undeveloped. There are no dealers in them outside the RBI who may be willing to buy
and sell any amount of such bills at market. The RBI is the sole dealer in them. In the U.S.A.
and the U.K. treasury bills are the most important money market instrument.

They are a very popular form of holding short-term surpluses by financial institutions, other
corporations and firms, because they are free from any risk of default, are highly liquid, and
yield a reasonable rate of return. For the government, they are a very important form of
raising funds.