Call Money Market

Call Money Market

Definition:
Call Money market is that part of the
national money market where the day-
to-day surplus funds, mostly of banks,
are traded in.
 Features of Call Money
Market
Repayable by demand: option of
either borrower or lender.
Highly liquid: liquidity exceeded only
by cash.
Short maturity: 1 day to a fortnight.
 CMM in US and UK
In US:
1. Federal Funds Market: Transactions
between member banks and Federal
Bank at a specified interest rate.
1. Reason for supply of funds: Excess
reserves than required.
2. Reason for demand of funds: Member
banks may have reserve deficits on
that day.
 CMM in US and UK
1. Call Money Market Proper: short-
term loans by banks to security
brokers and dealers for financing
customer purchase of common
stock.
1. In short: Its an inter-bank call market.
 CMM in US and UK
In UK:
1. Clearing Banks Loans to Discount
Houses.

2. Inter-bank Call Market.

3. Discount Houses as intermediaries

before approaching the Bank of
England for financial
accommodation.
 CMM in India
Call loans in India are given:
To the bill market.
For the purpose of dealing in the
commodity and the stock market.
Between banks. (most significant)
Frequently to high net-worth individuals
in Mumbai for ordinary trade purposes
to save interest in cash credits and
overdrafts.
 CMM in India
Unlike in other countries though, call
loans in India are unsecured because
the credit situation in India is seasonal.
Major indicators:
Decline in call/short notice is greater in the
slack season more than the busy season.
Increase in call/short notice is greater in the
busy season more than the slack season.
Highest increase is seen in March due to tax
withdrawals to meet year-end payments.
 Participation
Participants in the CMM in India are:
Scheduled and non-scheduled
commercial banks.
Foreign banks.
State, district and urban, cooperative
banks.
Discount and Finance House of India
(DFHI).
Securities Trading Corporation of India
(STCI).
 As per the latest RBI policy, LIC, UTI,
GIC, IDBI and NABARD are allowed to
be lenders and not borrowers.
They require a minimum size
operation of Rs. 20 crore per
transaction.
They can participate with prior
permission from the RBI, and only
through DFHI.
 Size of CMM
The size of the CMM can be gauged
with the help of information on the
total turnover (borrowings) in the
market.
The average total turnover in the call
money market increased from Rs.
14170 crore during 2004-2005 to Rs.
17979 crore during 2005-2006 to Rs.
21725 crore during 2006-2007.
Size of Indian CMM vis--vis US and
UK
It has been smaller. Major factors being:
The bill market in India is underdeveloped, so the
call loans to the bill market are small. In addition,
banks in India are not inclined to give loans to
brokers and security dealers.
Direct discounting facilities are available to banks
as a result of which, the demand for call loans
decreases (unlike the UK).
Loans to security dealers cannot be large due to
certain reasons. The volume of industrial
securities traded in India is also small (unlike the
US).
Variation of Demand and Supply of Call
Loans
Call loans are one of the avenues of
investment and the supply of call loans
would increase with increase in bank
deposits.
The demand depends upon the buoyancy
of the stock market and increase in
demand for industrial loans.
Demand also broadens in December,
March and June when the quarterly
advance taxes are due.
 It has been observed that system of
maintaining reserves weekly and
manipulation of the SLR, makes banks
operate in CMM as borrowers and lenders.
The pressure on the market, in the end of
the banking week, i.e. Fridays also
influences the demand for call loans as
there is a scramble for funds to make up
the shortfall of required reserves.
 Call Rates
Definition: The rate of interest paid on
call loans is called the call rate.
It is very volatile and varies from center
to center as well.
It is also sensitive to demand and
supply of call loans.
Two call rates in India:
The interbank call rate.
The lending rate of DFHI.
 Volatility of Call Rates: Variations
according to Trading Centres.
Among the 3 most important centres-
Chennai, Mumbai and Calcutta the call
rate is highest in Calcutta and lowest in
Mumbai. Some reasons are:
Demand is greater than supply in Calcutta.
Supply is more because many financial head-
offices are located in Mumbai. (RBI, LIC, UTI,
etc)
The call money rate generally moves in
sympathy with the rate of demand loans but it is
always lower than the latter.
 Reasons for Volatility
Large borrowings to meet CRR.
Established banks use CMM as a source of
funds to meeting structural disequilibria.
Factors in the market.
Withdrawal of funds by institutional
lenders for business needs.
Illiquidity of money markets.
Closely linked to forex market (RBI
intervenes then to control call rates).
 Reasons for Volatility
Continued..
Technical modalities in calculation of
reserves.
Structural deficiencies in the banking
systems.
 Development of CMM
Automated value-free services of securities
was facilitated to develop the
Collateralized Borrowing and Lending
Operations (CBLO).
CBLO segment members consist of banks,
FIs, insurance companies, mutual funds,
NBFCs, Corporates, etc.
The daily average turnover increased from
Rs. 47 crore in April 2003 to Rs. 2506 crore
in March 2004.
 Development of CMM
Mutual funds have emerged as the
largest suppliers of funds.
On demand, apart co-op banks, public
and private sector banks, the
composition has been changing.
With the transformation of the CMM into
pure inter-bank market in Aug 2005, the
average daily turnover increased to Rs.
32,390 crore in 2006-07.
 Policy Development
The RBI has instituted a series of prudential
measures and placed limits on borrowing and
lending of banks and PDs to minimize default risk.
In order to improve transparency, it was made
mandatory for all Negotiated Dealing System
(NDS) members to report their call money
transactions through NDS 15 mins before the
conclusion of the transaction.
The RBI and the members have access to this
information on a faster frequency and a classified
manner which further improves transparency.